World Economy

IMF raises global growth forecasts but warns against protectionism, relaxing banking rules

Christine Lagarde
Yuri Gripas | Reuters

Global growth is set to reach 3.5 percent this year and 3.6 percent in 2018, the International Monetary Fund said Tuesday.

The Fund has raised its growth forecasts slightly from estimates released last October as macro economic conditions eased for commodity exporters and investment levels grew in advanced economies.

However, the IMF warned that risks to global growth remain to the downside with structural issues holding back economic development.

"With persistent structural problems—such as low productivity growth and high income inequality—pressures for inward-looking policies are increasing in advanced economies. These
threaten global economic integration and the cooperative global economic order that has served the world economy, especially emerging market and developing economies, well," the International Monetary Fund said in its latest World Economic Report.

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US protectionism

The institute led by Christine Lagarde revised upwards its forecasts for the U.S. economy on expectations that fiscal policy will be eased, but it cautioned against the new administration's protectionist views. The U.S. is expected to expand 2.3 percent this year, up from 1.6 percent last year.

"Downside risks stem from several potential factors," The Fund said, including, "an inward shift in policies, including toward protectionism, with lower global growth caused by reduced trade and cross-border investment flows."

The IMF also said that if the Federal Reserve decides to raise rates at a faster pace, there will be a sharp dollar appreciation, which could hurt emerging economies. This is because their debt levels would increase as they borrow in dollars.

Furthermore, the Washington-based institution also raised concerns against a relaxation of financial regulation. U.S. President Donald Trump has plans to soften rules for banks as he believes the current regulation hinders lending to the real economy. But the IMF believes this could increase the likelihood of new financial crises.

China 'disruptive adjustment'

While the Fund raised China's growth forecast, it warned the economy was over-relying on government stimulus and credit to maintain growth.

"The resulting persistent resource misallocation, however, raises the risk of a disruptive adjustment in China," the IMF said.

China is expected to grow 6.6 percent in 2017 and 6.2 percent the year after.

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