Indonesian President Joko Widodo is deeply concerned about the future of the global economy. In his speech to the annual meetings of the International Monetary Fund and the World Bank in Bali last week he warned that “relations between the major economies are looking more and more like the Game of Thrones,” the dystopic fantasy of a world in constant struggle between feuding dynasties. Worried that the “situation might be more threatening than the financial crisis 10 years ago,” Widodo implored the assembled economic grandees to cooperate and avoid a future that would inflict a “tragic price” on the “defeated” and the “winners.”
While Widodo’s warnings were more colorful than most, he is not alone in his concern. Even though the global economy looks set to continue its expansion, there is mounting anxiety about geopolitical risks. The list of potential dangers is well known, but there is also fear of “black swans” that could trigger a downturn. Leaders must reaffirm their commitment to the principles that have enabled and sustained growth, and reinforce global economic institutions and mechanisms. Surprisingly, that is easier said than done.
The IMF expects the world economy to expand 3.7 percent in 2018 — the same as 2017 — but that is a decrease from 3.9 percent expansion forecast in July. The U.S. economy is projected to grow 2.9 percent, the largest increase since 2005, but it will slow to 2.5 percent next year as momentum injected by the Trump tax cuts fades. China will grow 6.6 percent this year, but that pace will drop next year to 6.2 percent, the slowest rate since 1990. Japan’s economy is forecast to expand 1.1 percent this year — there was no change in the forecast — and slow to 0.9 percent in 2019. World trade is slowing, though: The IMF projects global trade to expand 4.2 percent in 2018, a decrease from the 5.2 percent growth of 2017, and slowdown from the 4.8 percent predicted in July.
The reasons for the headwinds are well known. There are the tariffs that U.S. President Donald Trump has imposed on most of the U.S.’s major trading partners and the trade war that he seems intent on launching with China. Thus far, the two countries have declared sanctions on $360 billion of goods, and there is no sign that either is looking to back down, although there are reports that Trump may meet Chinese President Xi Jinping at the Group of 20 summit in Argentina next month. Even that is unlikely to accomplish much as the U.S. demands go to the heart of China’s industrial policy and Xi cannot afford much in the way of compromise.
In Europe, Brexit has already begun to roil markets and economies, but the European Union is also keeping a close eye on Italy, where the government is intent on expanding its budget and busting the EU’s limits on deficits. IMF officials warned that it is “not the time to relax fiscal policy” in Rome, but the Italian finance minister countered that any fiscal expansion was “limited.”
In Asia, there are concerns that Japan’s decision to follow through on plans to increase its consumption tax, while welcome for long-term stability, will jolt an already slowing economy. South Korea’s sluggish economy and hidden debt in China are also ringing alarm bells. Economists worry that the prospect of capital flight from emerging markets is evolving from a concern for a few specific countries to a more general and broad-based phenomenon. In addition, there is worry about the transparency of debt and the prospect of excessive burdens as a result of China’s “Belt and Road” initiative (a charge that Chinese officials vehemently deny).
In addition, there is the erosion of faith in institutions designed to manage the global economy, especially the World Trade Organization. This is part of a more general assault on the norms and principles that have guided the global economy for decades, attacks that have often originated in Washington. Trump’s criticism of the Federal Reserve, which he called “out of control” last week after it raised interest rates, is emblematic of this mind-set.
Finally, there are unforeseen risks that could have devastating impacts. For example, Saudi Arabia has reportedly threatened to slow oil production and push prices through the roof if it is punished for alleged murder of journalist Jamal Khashoggi, a sequence of events that no one could have envisioned even a week ago.
While combating the unknowable is a difficult assignment, dealing with these challenges is rather simple. As IMF Managing Director Christine Lagarde noted, there are “risks to the principles and institutions that underpin international cooperation, which has delivered so many benefits for so many people for so many years.” That cooperation must continue if the world is to weather these uncertain times. Debt must be controlled, currency and trade wars rejected. In simplest terms, she urged member countries to “de-escalate and please dialogue.”