The latest IMF world economic outlook released on Tuesday is the most positive for years, but it also highlights the continued risks from nationalistic and protectionist policies and the impact of policies and technology changes that reduce the share of income going to workers.

For the past eight or nine years, the IMF world economic outlook has been pretty soul crushing. Dismal doesn’t begin to convey the mood. Consider that the titles for the outlook have been such joyous reads as “Financial Stress, Downturns, and Recoveries”, “Crisis and Recovery”, “Slowing Growth, Rising Risks”, “Legacies, Clouds, Uncertainties” and the one from April last year, “Too Slow for Too Long”. So it is with some relief to see a bit of positivity infect the IMF. The most recent update, is titled, “Gaining Momentum?”

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The question mark of course lets us know that the folk at the IMF remain the sober pessimistic economists we know and love – and the blog post accompanying the report is titled “Gaining Momentum – For Now”.

But at least they do think things are on the improve – even if only for a while.

In October last year the IMF was predicting Australia’s GDP growing in 2017 by just 2.7% – they’ve now increased that to 3.1% – the most optimistic they’ve been since 2012.

They are also more positive about growth in China, the US and very much so in the UK, where the worries of last year about the immediate impact of the Brexit have been pushed out a few years:

Across the world, the prediction is for global GDP growth of 3.5% this year – up from the prediction of 3.4% made last October. Most of the improvement is coming from a better outlook for advanced economies – especially in the Euro area:

But the outlook beyond this year rather suggests that the answer to the IMF question about gathering momentum is “nope”.

The growth for 2018 is largely unchanged, except for the UK where there has been a big downgrade and the US, which has a big upgrade. The downgrade for the UK is due to the effects of Brexit, where the IMF predicts diminished medium-term growth prospects “because of the expected increase in barriers to trade and migration”.

And, crucially, the improvement in 2018 in the US is based on the assumption of “a sizable fiscal stimulus in the United States, reflecting the anticipated changes in US federal government tax policy”.

Given the difficulty Donald Trump apparently has doing anything other than finding his way to a golf course, and his utter incompetence in passing any major legislative measures, that is a very big assumption:

Looking out to 2022 (which is so far off, that admittedly it is of limited worth), the IMF sees Australia’s growth rarely going above the long-term average of 3%:

The IMF however does predict the unemployment rate will fall below 5% – a much more optimistic outlook than it has had for the past two years:

Mostly this increased optimism is because Australia exports iron ore, coal and gas. The IMF suggests that our economy will improve along with similar commodity-exporting nations like Norway and Canada. But this is based on the proviso that monetary policy remains “accommodative” (ie interest rates stay low) and there are “supportive fiscal policies or infrastructure investment” and “less drag from declining investment in the commodity sector.”

The IMF’s outlook not only examined economic growth, it also researched the impact of economic policies and technological changes that have reduced the share of national income going to labour.

The IMF found that over the past 25 years, the labour share of income has declined in 29 of the largest 50 economies:

One measure of the labour share of income is the real unit cost of labour. In Australia there were substantial falls of this measure from 1999 until the GFC:

The IMF suggests that across most nations, technological advancement is the main reason for the falls. It also found that the decline in share of income going to labour caused by technology and global integration “has been particularly sharp for middle-skilled labour” – with the biggest falls occurring in manufacturing.

But while falling real unit labour costs are trumpeted by businesses as crucial for maintaining Australia’s “competitiveness”, the IMF found that there was a strong correlation between falling shares of income going to labour and increasing inequality.

Looking at labour shares and Gini coefficients across advanced economies since 1961, the IMF found a clear link between the two – economies with lower shares of income going to labour were more likely to have higher levels of inequality:

But crucially the IMF study also found that the differences were not just across different countries, but within countries. They found that as the labour share of income fell within countries, the level of inequality was also likely to rise:

These results fit nicely with a new study published this week that found taxation “reforms” since the mid-1980s in Australia, New Zealand and Norway did nothing to improve economic growth, and instead just increased inequality – especially with more of the nations’ incomes going to the richest 1%:

The study’s authors conclude, these tax reforms, which lowered the top tax rate and made the system less progressive, did not “increase the size of the cake”, but did provide the wealthiest with a bigger share.

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In the period ahead, where the IMF, despite its muted optimism still predicts below average economic growth, the report highlights the importance of governments focusing on inequality. As the IMF outlook notes, “inequality can fuel social tension, and recent research suggests that it can also harm economic growth.”

Governments ignore inequality at their peril – not only because of the harm it will do to their own election prospects, but also the prospects to the economy.