Daily Commentary BY THE CURVE TEAM –

IMF’s Upgrade Comes With Caveat

23rd of January, 2018

The big news overnight was the IMF’s latest World Economic Outlook, of which we saw an upgrade to the outlook. The latest outlook from the IMF also included the impact of the recent tax changes in the US. There was also movement on the Government shutdown with a crisis averted for the time being.

The IMF was quite upbeat in the overall assessment of the outlook for world growth with their latest WEO saying that:

“The cyclical upswing underway since mid-2016 has continued to strengthen. Some 120 economies, accounting for three quarters of world GDP, have seen a pickup in growth in year-on-year terms in 2017, the broadest synchronised global growth upsurge since 2010.”

As a result, the IMF has  upgraded its growth projection for 2017 to 3.7% while for 2018 and 2019 it is projecting global growth of 3.9%, up 0.2% from the last forecast. The report said that “the revision reflects increased global growth momentum and the expected impact of the recently approved U.S. tax policy changes.”

Specifically on the US, the IMF said that “the U.S. tax policy changes are expected to stimulate activity, with the short-term impact in the United States mostly driven by the investment response to the corporate income tax cuts. The effect on U.S. growth is estimated to be positive through 2020”.

There was a caveat to their outlook that revolved around growing risks to financial markets as imbalances continue to grow. The report said that “rich asset valuations and very compressed term premiums raise the possibility of a financial market correction, which could dampen growth and confidence.”

The report also added that risks will continue to grow while “yield-seeking investors increase exposure to lower-rated corporate and sovereign borrowers and less creditworthy borrowers.” 

There was also more good news in the US with the government shutdown over for the time being as Democrats blinked first. The deal seemingly only pushes the problem further down the road. If the conditions around the re-opening aren’t met, the dance could start again in three weeks.

The big item to watch today will be the announcement from the BoJ as their monetary policy discussions are released.

David Flanagan

Director - Interest Rate Markets