Jun 2017 Financial News

IMF economic forecast: Bouncing back from recession

Jun 06, 2017

SHIFTS IN THE global landscape are taking place following disappointing growth in 2016. Momentum picked up in the second half of 2016, and the outlook for advanced economies has improved for 2017-18.

Better growth prospects in the United States, Europe, and Japan reflect some rebound in manufacturing and trade, as well as prospects of likely US fiscal stimulus in the wake of the November elections. As it seeks a new policy course, the US should see solid economic growth in the near term with job creation and rising inflation.

Meanwhile, growth prospects marginally worsened for emerging market and developing economies compared to last fall. However, financial conditions have improved here too, though financial risks and market volatility remain elevated. Stronger growth this year and next is projected for these economies, including China, given its stronger-than-expected policy support. On balance, global growth is envisaged to rise modestly in 2017 and 2018 but with widely dispersed risks.   

In this global setting, economies of Latin America and the Caribbean are recovering from a recession at the regional level in 2016. Regional activity overall is expected to pick up gradually this year and next, but the outlook is weaker than projected last fall.

Domestic fundamentals and developments, however, will continue to play a significant role in determining growth in many economies. At the same time, risks to regional growth have widened in a setting of higher global policy uncertainty. In this challenging external context, countries should aim for completing fiscal and external adjustments to preserve or rebuild policy buffers. 

The Caribbean Developments and Outlook

Prospects for the Caribbean region are improving, with growth in both tourism-dependent economies and commodity exporters projected to be in the 1.5 to three per cent range for 2017 and 2018. Several countries in the region registered strong growth in tourism in 2016 – in particular Belize, Grenada, Jamaica, and St Vincent and the Grenadines – as a result of higher arrivals in both the stopover and cruise segments.

This trend is expected to continue in 2017, supported by higher economic growth in the US, the main market for most destinations in the region. There are a few exceptions, however, such as Barbados, which is heavily dependent on tourism from the United Kingdom. The Zika epidemic appears to have had limited impact on the tourism industry in 2016 and early 2017.

Commodity exporters, including Trinidad and Tobago and Suriname, were hit hard by much lower commodity prices in 2015 and 2016, and are projected to return to modest positive growth in 2017 and 2018, benefiting from somewhat higher (though still low) commodity prices. Higher commodity prices should also help improve the external position of these countries in 2017 and 2018.

The impact of the expected shift in the US policy mix (with more expansionary fiscal policy and tighter monetary policy, relative to earlier projections) on the Caribbean region through the interest rate channel is likely to be limited, given limited capital flows and financial integration with the US. Appreciation of the US dollar could have a negative impact on competitiveness, particularly in countries with currencies tied to the US dollar. Other downside risks include further loss of correspondent banking relationships.

Policy Priorities

Public sector debt remains a major vulnerability for the region. In several tourism-dependent economies, the public-debt-to-GDP ratio is now declining from very high levels, with several countries, including Grenada, Jamaica, and St Kitts and Nevis, engaged in multiyear fiscal consolidation efforts. In these cases, continued fiscal prudence will be necessary to gradually reduce debt-to-GDP ratios to sustainable levels and to build and preserve buffers against adverse shocks.

In Barbados and Belize, public debt has continued to increase in recent years, and fiscal consolidation combined with structural reform is needed to put public debt on a clear downward trajectory. The situation in Barbados is becoming increasingly complex given the public sector’s large financing requirements, and as a result of the slow implementation of planned fiscal measures and reforms.

In Belize, the debt restructuring agreed upon with external bondholders in March 2017 – the third such operation in a span of just 10 years – provides meaningful cash flow relief but will not put public debt on a sustainable path unless supported by an ambitious economic reform programme.

In commodity-exporting countries, such as Trinidad and Tobago and Suriname, the decline in commodity prices exposed weaknesses in fiscal policy and led to large deficits, contributing to a rapid increase in public debt. In these cases, there is a clear need for tighter fiscal policies in the context of medium-term macroeconomic adjustment to re-establish a sustainable fiscal path and ensure debt sustainability.

In some countries in the region the financial sector is still burdened by poor asset quality, low profitability, and insufficient capital. As a result, banks are unable to play a positive role insustaining the ongoing recovery.

In the Eastern Caribbean Currency Union, the authorities have taken important steps to enhance the resilience of the banking sector, including by passing key legislation and through the successful resolution of problem banks.

Further reforms will be required to durably strengthen the banking system, including strengthening the supervision of banks and non-bank financial institutions and increasing the capital adequacy of indigenous banks. Efforts to strengthen the financial sector are also under way in other countries in the region.

To improve long-term prospects, stronger implementation of structural reforms is necessary. Notably, efforts are needed to better align wage setting with productivity and to reduce energy and business financing costs. Measures to boost competitiveness include improving education, mitigating skills mismatches, accelerating contract dispute resolution processes, and reforming insolvency regimes.

 

Source:
Nation News
Tuesday June 6, 2017

http://www.nationnews.com/nationnews/news/97209/imf-economic-forecast-bouncing-recession