Global economic activity has expanded at a modest pace in the recent times, supported by firming growth in major advanced economies and in some emerging market economies as well. Consequently, the global growth has been anticipated to increase to 3.5 % in 2017 and 3.6 % in 2018, with optimistic financial markets and an expected recovery in manufacturing and trade.
In advanced economies, the pickup is mainly driven by higher projected growth in the United States , where activity was held back in 2016 by inventory adjustment and weak investment. In line with stronger than expected momentum in the second half of 2016, a stronger rebound in advanced economies is expected. The outlook has also improved for Europe and Japan on the basis of a cyclical recovery in global manufacturing and trade that accelerated in the second half of 2016. The pressures for inward-looking policies, with structural problems such as low productivity growth and high income inequality, are increasing in advanced economies.
While growth is still expected to pick up for the emerging markets and developing economies, weaker than expected activity in some countries has led to small downward revisions to the growth prospects for 2017 in these economies. However, growth forecasts have been marked up for China , reflecting stronger than expected policy support, as well as for Russia , where higher oil prices strengthens the recovery in 2017 as well as 2018.
Financial stability since last October has continued to improve. Economic activity has gained momentum and long term interest rates have risen, leading to a boost in the earnings of banks and insurance companies. Market sentiments have generally been strong, with outstanding gains in equity markets in both advanced and emerging market economies. Expectations of loose fiscal policy in the United States have contributed to a stronger dollar and higher U.S. Treasury interest rates, pushing up the yields in other economies as well.
Headline inflation has been picking up in advanced economies, many emerging market and developing economies due to higher commodity prices, but the dynamics of core inflation in advanced economies remain passive and heterogeneous.
On the trade front, Global trade is forecasted to expand by 2.4% in 2017. However, as uncertainty about near-term economic and policy developments raise the forecast risk, this figure is placed within a range of 1.8% to 3.6%. The WTO has forecasted trade growth between 2.1 % and 4 % in 2018.
Therefore, the policy choices are important in shaping the outlook and reducing the risks. In economies with weak core inflation, cyclical demand support is necessary. In economies where the output is close to or above potential output, fiscal policy in those economies should aim at intensification of safety nets and increasing potential output. Also, strategies are required in many countries to put public debt on a sustainable path. Actions to increase potential output are needed, given the challenges from ageing of population in advanced economies and the adjustment to lower terms of trade in emerging market and developing economies, as well as slow total factor productivity growth in these economies.
To sum up, many of the challenges that the global economy faces require individual country actions to be supported by multilateral cooperation. The key areas for collective action include preserving an open trading system, safeguarding global financial stability, achieving equitable tax systems, continuing to support low income countries as the economies pursue their development goals, and mitigating and adapting to climate change in the coming time