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IMF revises forecasts higher, but how should governments plan ahead?

Photo: Shutterstock

Photo: Shutterstock

It is no secret that the world economy is gaining traction. Economic data points have been indicating that this has been the case over the past 12 months or so, and recent central bank activity by the US Federal Reserve is testament to this.

The momentum in global activity has spilled over onto 2018 from what has been a year of transition. It therefore comes as no surprise that in the International Monetary Fund’s (IMF) recent World Economic Outlook Update the forecast for the world economy’s growth in both 2018 and 2019 has been revised upwards to 3.9%.

This means that for both years, that equates to 0.2 percentage points higher than last October’s forecast, and 0.2 percentage points higher than the IMF’S current estimate of last year’s global growth.

And this has also been reflected in global capital markets – sovereign bonds yields are on the rise, high yield spreads continues to grind tighter, equities rally and there seems to be no stopping emerging markets.

All seems rosy if we were to brush the surface. The ingredients for bond yields to rise, equities to remain in demand and for global growth to prosper appear intact.

However, investors and analysts alike must remain wary that political leaders and policymakers must primarily be aware that the present economic momentum is a result of a number of factors which might not be present ad-eternum, and this feel-good-factor might not last as long as the hype it is portraying.

It is true that the global financial crisis may seem firmly behind us, mainly after aggressive accommodative stances by the world’s leading central banks, which had a ripple effect on the sanity on central governments and subsequently on corporations.

However, we must all acknowledge that without prompt and concrete action to address structural growth gaps, as well as enhance the construction of policy buffers and resilience to other possible future unforeseen crises, then the next economic downturn, when it eventually comes, might be a tougher nut to crack.

It is at this juncture, that central governments must focus their efforts on soul searching and come up with solutions as to how, politics aside, ensure that their respective economies can strive and withstand another economic shock, and view their economies as a part of the world economy and not isolation. Efforts should be raised on finding ways and measures as to how governments can raise economic efficiency and output levels over the longer term.

More importantly, governments need to rack their brains and devise robust structures which ensure that when the current upswing ends, its effect is dampened, and avert the likelihood of another crisis.

It is at times like these when the world’s central governments have the ‘luxury’ of planning for rougher times and ensure that policies and tools are in place to counter the next downturn.

Disclaimer: This article was issued by Mark Vella, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.

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