The Strategist

IMF: Growth in Europe pushed the world's economy up

11/14/2017 - 14:27

The European economy has shown an impressive turn in recent years.

Now, the IMF considers Europe an "engine of world trade" thanks to the turn from a weak position in which a number of countries needed a bail-out, and central banks conducted unprecedented incentive programs to prevent wider shocks, to and economic growth.

The latest IMF survey, published today, noted that the recovery in Europe is so strong that it has an impact on the rest of the world. It is expected that this year the European economy will grow by 2.4%, and next year - by 2.1%, after in 2016 its GDP increased by 1.7%. For 2017 and 2018 years, it is expected that GDP growth forecasts will be revised by 0.5 pp and 0.2 percentage points, respectively, after the forecasts made a year earlier. The IMF notes that economic growth has not been so uniform in the euro area over the past two decades.

The IMF said that the improvement of forecasts is mainly due to the restoration of Europe. Last year, world trade slowed. This year, the WTO expects it to increase again, but protectionist political approaches (especially in the US) make the situation in the organization with regard to improvement extremely uncertain. Europe is an unexpected bright spot, pushing the world economy forward in this regard.

"The strengthening of economic recovery caused by domestic demand in Europe has also strengthened global trade, taking into account the contribution of Europe to the growth of global imports of goods in 2016-1917, as in China and the United States," the IMF said.

A positive assessment of the IMF arose after the European Commission predicted that the region was going through a strong year. According to forecasts, the economy of the eurozone will grow at the fastest pace in a decade, and this year the GDP will increase by 2.2%. This is a big improvement after an earlier forecast of 1.7% six months ago.

The good news made JPMorgan Asset Management update its outlook for the long-term outlook for the euro zone economy for the first time in a decade. It is now expected to grow by 1.5% over the next 10-15 years compared to 1.25%.

"GDP growth in the euro area outpaced the US growth by a couple of tenths of a percent the past two years," said John Bilton of JP Morgan Asset Management.

"This recovery in many European countries is now strengthening increasingly," said Jörg Decressin, deputy director of the European Department of the IMF, said at the presentation of the report on the region's economy published on Monday.

Several years of unprecedented monetary stimulus helped reduce unemployment in the region and strengthen personal consumption. However, the IMF warns that "the sustainability of the rebound remains questionable" in the long term against the backdrop of unfavorable demographic trends and moderate productivity.

Nevertheless, in the short term there are risks of increasing the forecast. "There may be a stronger recovery around the world, but a stronger growth in domestic demand in Europe is also possible, especially in those countries of Eastern Europe where we are witnessing an ever-growing wage growth," Jörg Decressin explained.

Higher demand in Europe already stimulates world trade. According to the IMF, Europe's contribution to the growth of global imports of goods in 2016-2017 is similar to the contribution of China and the United States in the aggregate. One exception is Great Britain, where demand slowed down after the weakening of the pound sterling led to an acceleration of inflation and a decrease in real incomes.

Europe gaining momentum should contribute to an increase in inflationary pressures, after many developed countries have observed a slow rise in prices for several years.

While central banks need to be prepared to gradually reduce incentives as wages accelerate, the IMF warned regulators should be patient and allow this trend to prove their sustainability.

"For the euro area and most of the developed countries in Europe, restrained core inflation indicates the need to maintain a stimulating monetary policy for a long period," the fund's experts believe.