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IMF Global Outlook Strong, but Pockets of Weakness Remain

Global output is projected to grow 3.5% in 2017 and 3.6% in 2018, although the upbeat climate isn’t widespread, according to the International Monetary Fund’s “World Economic Outlook Update” released Monday.

U.S. growth projections are lower than IMF’s April report, reflecting the expectation that fiscal policy will be less expansionary. Growth has been revised up for Japan and the Euro Area, where positive activity in late 2016 and early 2017 point to solid momentum.

China’s growth projections have also been revised up, reflecting a strong first quarter of 2017 and expectations of continued fiscal support. Inflation in advanced economies remains subdued and generally below targets, with declines in several emerging economies, like Brazil, India and Russia.

On the upside, the cyclical rebound could be stronger and more sustained in Europe, where political risk has diminished. On the downside, rich market valuations and low volatility in an environment of high policy uncertainty raise the likelihood of a market correction, which could dampen growth and confidence.

“Monetary policy normalization in some advanced economies, notably the U.S., could trigger a faster-than-anticipated tightening in global financial conditions, and other risks…including a turn toward inward-looking policies and geopolitical risks, remain salient,” IMF said.

Growth output in the first quarter was higher than the April forecasts in large emerging and developing economies such as Brazil, China and Mexico, and in several advanced economies, including Canada, France, Germany, Italy and Spain.

Growth in global trade and industrial production remained above 2015-16 rates despite retreating from the strong pace registered in late 2016 and early 2017.

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Currency and commodity status

Oil prices have receded, reflecting strong inventory levels in the U.S. and a pickup in supply. Headline inflation also generally softened as the impact of the commodity price rebound of the second half of 2016 faded, and remains at levels well below central bank targets in most advanced economies.

In the currency realm, the dollar has depreciated about 3.5% from March through the end of June, while the euro has strengthened by a similar amount. Over the same period, exchange rate changes across emerging market currencies have been relatively modest, with some strengthening of the Mexican peso on tighter monetary policy and reduced concerns about U.S. trade frictions, and a depreciation of the Brazilian real on renewed political uncertainty.

Country forecasts

Looking at broader economic outlooks, the growth forecast in the U.S. has been revised down to 2.1% from 2.3% for 2017 and to 2.1% from 2.5% for 2018. While the markdown in the 2017 forecast reflects the weak growth output in the first quarter, the major factor behind the growth revision is the assumption that fiscal policy will be less expansionary than previously assumed, given the uncertainty about the timing and nature of U.S. fiscal policy.

The growth forecast has also been revised down for the U.K. on weaker-than-expected activity in the first quarter. By contrast, forecasts have been revised up for many Euro Area countries, including France, Germany, Italy and Spain, where growth for the first quarter was generally above expectations.

The outlook was also revised up for Canada, where buoyant domestic demand boosted first-quarter growth to 3.7% and indicators suggest resilient second-quarter activity, and marginally for Japan, where private consumption, investment and exports supported first-quarter growth.

Emerging and developing economies are projected to see a sustained pickup in activity, with growth rising to 4.6% in 2017 from 4.3% in 2016, and rising to 4.8% in 2018.

China’s growth is expected to remain flat at 6.7% in 2017 and to decline to 6.4% in 2018, reflecting an expectation that authorities will delay the needed fiscal adjustment to meet their target of doubling 2010 gross domestic product by 2020.

Growth in India is forecast to pick up in 2017 and 2018, while an uptick in global trade and strengthening domestic demand in the ASEAN economies is projected to remain robust at around 5 percent.

[Red more about emerging economies: Did BRICs Hit the Bricks? Why the Emerging Economies Aren’t Seeing the Same Growth]

In Turkey, exports recovered strongly in the last quarter of 2016 and the first quarter of 2017 following four quarters of moderate contraction, and external demand is projected to be stronger. The Russian economy is projected to recover gradually in 2017 and 2018.

After contracting in 2016, economic activity in Latin America is projected to recover gradually as a few countries—Argentina and Brazil—exit their recessions. Brazil’s forecast is improved in light of a strong first quarter, but ongoing weakness in domestic demand and an increase in political and policy uncertainty will be reflected in a more subdued pace of recovery.

Mexico’s growth forecast for 2017 is revised up to 1.9% from 1.7% on the back of strong activity in the first quarter. Revisions for the rest of the region are mostly to the downside, including a further deterioration of conditions in Venezuela.

Growth in the Middle East, North Africa, Afghanistan, and Pakistan region is projected to slow considerably in 2017 before recovering in 2018. In Sub-Saharan Africa, the outlook remains challenging. Growth is projected to rise in 2017 and 2018, but will barely return to positive territory this year.

Around the world, failure to lift potential growth could fuel protectionism and hinder market-friendly reforms, resulting in disrupted supply chains, lower productivity and higher-priced consumer goods.

“A rule-based and open world trading system is especially vital for global prosperity, but it must be supported by domestic policies to facilitate adjustment, not only to trade but to rapid technological change,” IMF added.