Editorials

'A delicate moment' for the global economy

The International Monetary Fund is increasingly pessimistic about the global economic outlook, and with good reason. The reasons for concern are well-known: an incipient trade war between the world’s two largest economies, slowdowns in both those countries, disdain for global trade rules and institutions in Washington, hitherto the leading supporter of that order, and Britain’s never-ending quest to agree on terms for its withdrawal from the European Union. While a recession is not certain, it is “a delicate moment,” according to Christine Lagarde, managing director of the IMF.

The IMF in January lowered its forecast for global growth in 2019 and 2020 to 3.5 percent, a downward adjustment that reflected a slowing global economy in the second half of 2018: After expanding 3.8 percent in the first half of the year, growth dropped to 3.2 percent for the second six months. In the World Economic Outlook published this week, the IMF dropped that estimate further still. Now the organization reckons that growth will only reach 3.3 percent, a level recorded in 2016, and the weakest level recorded since 2009.

Japan is expected to mark 1 percent growth, an improvement from the 0.8 percent reached last year but less than the January forecast. The U.S. economy is anticipated to grow 2.3 percent, a substantial decrease from the 2.9 percent in 2018; Europe will register a 1.3 percent expansion, a 0.5 percentage point drop from its 2018 performance. By comparison, China’s 6.3 percent forecast looks explosive — especially since it is a slight increase from the 6.2 percent anticipated earlier in the year — but it too is a drop from 6.6 percent in 2018.

The biggest cloud hanging over the international economy is the prospect of a prolonged trade war between the United States and China, and a concomitant erosion of the commitment to free and open trade. The IMF has projected a drop in the growth of world trade from 3.8 percent in 2018 to 3.4 percent in 2019 — a significant drop from the 4 percent growth expected at the beginning of the year.

In addition, the slowdown reflects a general loss of momentum throughout the world. The U.S. tax cuts of 2017 supercharged its economy; Lagarde noted that two years ago growth was expanding in three-quarters of the global economy.

If the outlook is worrisome, both Lagarde and IMF chief economist Gita Gopinath argue that a global recession is not imminent. That depends, however, on avoiding policy mistakes. The single most obvious mistake is continuing the trade war that is being waged by Washington and Beijing. Both governments are engaged in a tit-for-tat exchange that has resulted in the imposition of billions of dollars in tariffs on imports from the other country, a misguided policy that is adding billions of dollars in costs to consumers, threatening supply chains and undercutting business confidence. More troubling is the prospect that this will encourage other governments to emulate the U.S. and China and impose tariffs on imports to protect their own national companies.

There are some reasons for hope, however. Lagarde noted that the U.S. Federal Reserve’s decision to hold off on additional interest rate hikes displayed the proper sensitivity to economic conditions and did not put theory or previous statements ahead of practical concerns. Indeed, in the absence of more mistakes, the IMF anticipates that growth will pick up in the second half of this year and into the next. U.S. President Donald Trump is likely to be frustrated, however, since it is projected that growth there will continue to fall to only 1.7 percent by the time he must again face the voters. (One survey of business professionals show that 85 percent expect an actual downturn by then.)

The government of Prime Minister Shinzo Abe should have this trajectory in mind as it plans for the Group of 20 summit it will host in June. Those governments must be prepared for a downturn and get ahead of that possibility. A renewed commitment to open and fair trade is an obvious first step, as are efforts to promote reform and restore confidence in the World Trade Organization. Central bankers must prepare accommodative monetary policies to ensure that there is liquidity in the event of a crisis, while governments prepare stimulus packages. Closer surveillance of financial institutions is a must too, amid warnings of growing “debt bombs” in various corners of the economy.

There are mainstream, common sense recommendations; sadly, there is a real risk that they will not be implemented. The failure to do the obvious is one more reason why this moment remains “delicate” and precarious.