“Last April, at the time of our last World Economic Outlook, the world economy’s broad‑based momentum led us to project a 3.9 percent growth rate for both this year and next [but] considering developments since then, that number now appears overoptimistic”, Maury Obstfeld, the IMF’s Economic Counsellor and Director of Research said at a press conference convened in Bali on Tuesday, ahead of the fund’s annual meeting.
“Rather than rising, growth has plateaued at 3.7 percent”, Obstfeld continued, before warning that “there are clouds on the horizon.”
It comes as no surprise that the IMF cut their outlook for global growth. The fund has for months warned that a variety of headwinds (not the least of which are trade frictions) could serve to undermine the global economy in the year end. Last week, Christine Lagarde essentially confirmed that the outlook for this year and next would be slashed.
At Tuesday’s presser in Indonesia, Obstfeld went on to suggest what more than a few economists have suggested – namely that the effects of late-cycle stimulus in the U.S. are likely to prove ephemeral.
“In several key economies, growth is being supported by policies that seem unsustainable over the longer term”, he warned, before getting more specific as follows:
Growth in the United States, buoyed by a pro‑cyclical fiscal package, continues at a robust pace and is driving U.S. interest rates higher, but U.S. growth will decline once parts of its fiscal stimulus go into reverse.
Apparently, world-renowned economist Larry Kudlow was not consulted.
Obstfeld went on to link the IMF’s decision to downgrade the 2019 outlook to the U.S.-China trade war. “Notwithstanding the present demand momentum in the U.S., we have downgraded its 2019 growth forecast, owing to the recently enacted tariffs on a wide range of imports from China and China’s retaliation”, he said, adding that while “domestic Chinese policies are likely to prevent an even larger growth decline than the one we project,” that will ultimately “come at the cost of prolonging internal financial imbalances.”
That’s a key point. The Trump administration’s trade policies are effectively keeping China from defusing a number of ticking time bombs in their financial system.
Digging a little deeper, the IMF slashed projected 2018‑2019 growth for advanced economies by 0.1%, that includes cuts to the outlook for the eurozone, the UK and Korea. For the emerging world, the downward revisions are steeper.
Here is the table with the complete breakdown:
Obstfeld warned about the possible unwind of the imbalances that accompanied nearly a decade of easy money policies from developed market central banks and alluded to the mad dash from EM policymakers to hike rates in order to stem currency declines. To wit:
For emerging and developing economies, gradually tightening U.S. monetary policy, coupled with trade uncertainties and, for countries such as Argentina, Brazil, South Africa, and Turkey, distinctive factors have discouraged capital inflows, weakened currencies, depressed equity markets, and pressured interest rates and spreads. The high levels of corporate and sovereign debt built up over years of easy global financial conditions, constitute a potential fault line.
The fund does say that for now, it’s unlikely that investors will flee emerging markets at a pace that could pose a systemic risk. But that ostensibly comforting assessment comes with a couple of caveats. To wit:
Importantly ‑‑ and I want to stress this ‑‑ we do not see recent developments as part of a generalized investor pullback from emerging and frontier markets, nor do we expect the current problem cases necessarily to spill over to countries with stronger fundamentals. Many emerging economies are managing relatively well, given the common tightening they face, using established monetary frameworks based on exchange rate flexibility. But there is no denying that the susceptibility to large global shocks has risen. Any sharp reversal for emerging markets would pose a significant threat to advanced economies, as emerging market and developing economies’ GDP now constitutes about 40 percent of world GDP at market exchange rates.
Obstfeld also warns that “new’ NAFTA isn’t yet approved by lawmakers and he expressed concern over Brexit.
As far as the Trump administration’s protectionist bent, the IMF is not amused. “U.S. tariffs on China and, more broadly, on auto and auto part imports may disrupt established supply chains, especially if met by retaliation”, Obstfeld went on to caution, echoing the sentiments of nearly everyone on the planet save Peter Navarro, Wilbur Ross and the nice orange man in Oval Office.
In the blog version of the announcement, Obstfeld acknowledges the disaffection among middle income workers in developed economies, but warns that concerns must be addressed in a rational way that avoids the wholesale dismantling of multilateral institutions. We’ll leave you with his comments on that:
Perhaps the biggest secular challenge for many advanced economies centers on the slow growth of workers’ incomes, perceptions of lower social mobility, and, in some countries, inadequate policy responses to structural economic change.
All countries must prepare their workforces for the ways that new technologies will change the nature of work. Ensuring that growth is inclusive is more important than ever. Unless growth can be made more inclusive than it has been, centrist and multilateral approaches to politics and policy will become increasingly vulnerable—to the detriment of all.