Washington—Neither euphoria nor frustration is justified regarding the world economic outlook, as the global economy is still gaining momentum, according to economists at the Peterson Institute for International Economics (PIIE). Growth at or above potential is forecast for the United States and Europe in 2017 and 2018, despite an atmosphere of political and policy uncertainty, while Japan, China, and India all are expected to continue contributing to global growth as well. A Fed tightening cycle will likely further divergences in currencies and policies among the major economies but need not spell the end of the recovery. Among emerging markets, deep recessions are bottoming out only now in Brazil, Russia, Argentina, and others, and higher global interest rates will create headwinds but not reversals.
These and other assessments will be presented in PIIE’s semiannual Global Economic Prospects program, which will be webcast live at 12:15 pm (ET) on Wednesday, April 12. David J. Stockton, PIIE senior fellow and former Federal Reserve chief economist will lead off the discussion with his global forecast. Karen Dynan, PIIE’s newest senior fellow and former US Treasury assistant secretary, will discuss the prospects for changes in US fiscal policies and the associated implications for macroeconomic developments. PIIE senior fellow and former Fed official Joseph E. Gagnon will assess the Federal Reserve’s transition to monetary tightening and its impact.
In the United States, Stockton is doubtful about the prospects for major tax reform. Instead he expects modest tax cuts for businesses and households, along with some spending increases, which will provide a small boost to activity over the next few years. He states that these actions will add a percentage point of GDP.
Dynan has examined the potential impact of current policy proposals. She shares Stockton’s overall assessment about the limited size and benefits of the tax and spending measures likely to be passed by the Congress, and additionally is skeptical of any substantial impact from the deregulation agenda. She will call for policies to increase labor force participation and productivity growth, which could be more useful at the same direct fiscal cost.
In the absence of expansionary fiscal policy, the new normal short-term interest rate has decreased from 4.0–4.5 to 2.5–3.0 percent, according to Gagnon. In his view, the Fed will move slowly and react to fiscal expansion only if it occurs as a result of legislation. The Fed may allow inflation to rise slightly above its 2 percent target, but if a fiscal expansion threatens to increase inflation, the Fed may be forced to raise interest rates faster.
The Peterson Institute for International Economics is a private nonpartisan, nonprofit institution for rigorous, intellectually open, and in-depth study and discussion of international economic policy. Its purpose is to identify and analyze important issues to make globalization beneficial and sustainable for the people of the United States and the world, and then to develop and communicate practical new approaches for dealing with them. Its work is funded by a highly diverse group of philanthropic foundations, private corporations, and interested individuals, as well as by income on its capital fund. About 35 percent of the Institute's resources in its latest fiscal year were provided by contributors from outside the United States. View a list of all financial supporters for the preceding four years.