Growth during 2017. The IMF has released the second of its biannual World Economic Outlooks for 2017, and it paints a relatively rosy outlook. For the first time in several years, it has raised forecasts of growth rather than lowering them. For example, it has upped its projected growth for the world economy for 2017 to 3.6% from 3.4% and for 2018 to 3.7% from 3.6%. Drivers for this are upward revisions to the OECD, Asian and Eastern European countries with downward revisions confined to commodity producing regions such as Africa and the Middle East. This optimism is in marked contrast to the pessimism predominant only 18 months ago as a result of a mild slowdown and a fall in commodity prices. This affected business optimism and led to a fall in investment, the main driver of the slowdown. This slowdown reversed itself in the spring of 2016 and has gathered strength ever since. As always, sentiment takes time to catch up on what is happening on the ground and it is only this year that analysts have appreciated just how strong the recovery is most notably in low growth areas like Europe and Japan. Much is made of the so-called anaemic growth since the GFC in 2008. This reflects two things. The first is the long term structural slowdown in OECD growth that has been going on since the 1970s and is in part due to a productivity slowdown and in part due to demography. The second is that some of the slowdown is due to weak government consumption, as governments have tightened fiscal policy. Even so, growth in the OECD has hardly been disastrous in the last few years, averaging just under 2%. What does this mean for monetary policy? Inflation remains low in most of the world and below most central banks’ targets. Bond yields also remain low and show no sign of rising dramatically. The Federal Reserve certainly wants to normalise policy but admits to the inflation conundrum. The ECB and BoJ are both still indulging in QE but will face the dilemma soon of withdrawing that easing. One answer for the inflation conundrum is that the world is still operating under conditions of excess capacity though whether that negative output gap is narrowing, only time and the inflation data will tell. If the world still faces such an output gap and it is not narrowing, then it is wrong to raise interest rates. If the output gap is narrowing, then the Fed’s policy is right as it slowly tilts against the wind with a very gradual tightening in policy. What it must avoid doing, however, is raising short-term rates higher than long-term rates, so creating a negative sloping yield curve. This would tip the world into a totally unnecessary recession, given that inflation remains low. A recession will only be necessary when the world is experiencing a rapid rise in inflation and bond yields, and we are not there at the moment.