Editorials

IMF's troubling economic outlook

The global economy continues to slow and the primary problem is the geopolitical outlook. That is the primary message in the latest International Monetary Fund World Economic Outlook, released last week in anticipation of the fall meetings of that organization and the World Bank. Other dangers loom, however, and policymakers must be alert to a range of challenges that threaten global stability and well-being.

Growth in 2019 will be the weakest since the 2008 financial crisis. The IMF anticipates global growth of 3 percent, a drop of 0.3 percentage points from its April forecast, and a substantial reduction from the 3.6 percent expansion that occurred last year.

The risk factors are well known: the U.S.-China trade war, rising tensions in the Middle East and the Persian Gulf, Brexit and a slowdown in the largest economies. Trade disputes are the biggest problem. A growing readiness to impose tariffs on trade partners has slowed the growth in trade in the first six months of the year to 1 percent, the most anemic annual performance since 2012. Kristalina Georgieva, the new managing director of the IMF, warned that trade disputes could cost $700 billion in global output by the end of next year, about 0.8 percent of the world total.

The ceasefire agreed by the United States and China this month is a respite, but most tariffs remain in place, and there is little optimism that the fight will end. The big issues remain unresolved and they involve policies for which there is little room for compromise. The U.S. has pledged to impose an additional $160 billion in tariffs in the absence of progress; China will surely retaliate, and that will ripple through the global economy.

The trade war has intensified the slowdown in China. Its economy has been decelerating for years, which is natural for an economy that is developing and maturing. The IMF forecasts China’s growth will fall to 6.1 percent this year and then to 5.8 percent in 2020, the slowest rates since 1990, when the country was hit by international sanctions in the aftermath of the Tiananmen Square massacre.

China’s economists are more pessimistic, concluding that third-quarter growth has already fallen to 6 percent. Its exports fell 3.2 percent from the previous year, a troubling sign for an economy that is heavily dependent on access to foreign markets. The IMF reckons that escalation of the trade war will cost China another 2 percent of GDP.

And contrary to U.S. President Donald Trump’s dictum that trade wars are good and easy, the IMF concluded that the trade war has cost the U.S. 0.6 percent in wealth; the IMF projects that its economy will also slow, recording a mere 2.4 percent expansion in 2019, a half percentage point drop from 2018. Global GDP is 0.8 percent smaller as a result of the dispute.

The IMF identifies other problems such as Brexit and the Middle East. Reports of an agreement between the United Kingdom and the European Union are to be applauded, but it is not clear that the U.K. or the EU is prepared for the perturbations that will follow the rupture. Violence and instability seem to be a constant in the Middle East but turbulence appears now to have engulfed virtually the entire area. The region’s key role in the supply of energy means that crises there not only disrupt supply chains but the mere prospect of instability wreaks havoc on international financial markets.

IMF economists are alert to other dangers, too. They note that central banks continue to cut interest rates to boost economic growth, an approach that has contributed about half a percentage point to growth this year, but a tactic that leaves policymakers perilously exposed if there is a sharp downturn and they need a ready tool to spur growth. Low rates have also pushed large investors to search for yields in more risky, less liquid investments.

This is occurring as governments roll back some of the regulations imposed in the aftermath of the 2007-2008 global financial crisis. The IMF drily notes that “easy financial conditions are encouraging financial risk-taking and are fueling a further build-up of vulnerabilities in some sectors and countries.” In some countries, debt substantially exceeds the revenues available to finance it. This renders tentative the weak rebound of 3.4 percent the IMF forecasts for 2020.

Japan’s economy is anticipated to grow just 0.5 percent next year, its structural problems compounded by the trade war waged by its two largest trade partners and the prospect of being hit by sanctions by the U.S. To their credit, Japanese companies have improved profitability and, almost alone among the world’s largest economies, reduced speculative debt, but a downturn on the scale of the global financial crisis would render too large a portion of corporate debt unserviceable. Alert and anticipatory policy is required; while their influence is limited, Japanese policymakers must do more to shape the global economic environment.

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