The International Monetary Fund has issued a barrage of documents over recent weeks – the World Economic Outlook update, a G20 Surveillance Note to finance ministers and central bank governors for their recent Buenos Aires meeting, and the annual External Sector Report. They provide a comprehensive overview of the IMF’s current thinking on global economic developments.
The Fund continues to project 3.9% global growth for 2018 and 2019. The overall projections for advanced economies, as well as emerging markets and developing countries, remain largely unchanged. However, the IMF also highlights that disconcerting trends are beginning to loom much larger.
The robust US near-term outlook is unchanged (2.9% in 2018 and 2.7% in 2019), but is being sustained by an ill-timed expansionary and procyclical fiscal policy. Any unanticipated rise in inflation could result in faster and unanticipated tightening.
Euro area activity may have already peaked, particularly as export prospects abate, and the outlook has been slightly marked down for this year. The spike in Italian yields and continuing political uncertainty could trigger major financial market fallout, while major questions around Britain’s exit from the European Union remain unresolved.
The Chinese outlook remains unchanged at around 6.5% growth for 2018-19. But following credit-fuelled growth in past years, Beijing is curbing shadow finance and deleveraging the financial system. Global developments also weigh on export prospects. China has recently taken easing measures. Elsewhere in Asia, Japan’s outlook has been marked down for 2018.
Altogether, growth in the advanced economies is increasingly asynchronous. China, a major engine of global growth, faces steep challenges. Moreover, higher US rates are contributing to capital outflows and currency depreciation in emerging markets. Many of these markets will use macroeconomic tools and buffers to cope. But others face idiosyncratic risk due to their vulnerable fundamentals.
On top of these developments, unpredictable wrangling over trade is stoking tensions globally. In one simulation, the Fund shows that while the impact of trade restrictive measures taken to date is not large for global GDP, losses could rise to around 0.5% of global GDP (more than $400bn) if trade retaliation causes confidence shocks.
The IMF’s External Sector Report reinforces such concerns. Looking at global imbalances and their sustainability, this year’s edition finds that global imbalances – 3.25% of global GDP – remain persistent and concentrated in the advanced economies. Germany, the Netherlands, Japan and South Korea are among the key surplus countries, with the US and UK featuring as prominent persistent deficit countries. Emerging markets, especially China, have seen their imbalances decline dramatically.
The report correctly argues that imbalances may reflect the structure of an economy and are not intrinsically controversial. But ‘excessive’ imbalances – those not reflecting fundamentals and ‘desirable’ policies – are problematic. The report finds that 40%-50% of 2017 imbalances, around $1.3tn, may be ‘excessive’.
At their summit in Pittsburgh in September 2009, G20 leaders stressed that the best way to promote strong, sustainable and balanced global growth was through multilateral co-operation – deficit countries should raise national saving, and surplus countries should boost domestic demand above GDP growth and save less. The US observed that it couldn’t be the world’s importer of first and last resort; if surplus countries did not do their part at a time when US national saving rose, global growth would simply be lower.
This multilateral approach is now reversing. Procyclical fiscal policies under President Donald Trump are contributing to lower national saving, dollar strength and boosting the US current account deficit. Meanwhile, the German surplus remains stuck at around 8% of GDP. Germany continues to be strongly attached to the ‘schwarze Null’ (literally, ‘black zero’) of balanced budgets, and corporate and household saving remain buoyant.
Persistent and rising current account imbalances could incite further protectionist pressures. They also widen the stock of country assets and liabilities, enlarging surplus and deficit international investment positions.
Altogether, and looking beyond the Fund’s sanguine near-term outlook, the message for global financial markets is potentially disquieting.
The outlook is for policy divergence – further rate increases by the Federal Reserve v. Chinese easing, and European Central Bank and Bank of Japan accommodation regardless of future normalisation plans. This could translate into dollar strength and currency weakness abroad. European political hazards, protectionism, few prospects for reductions in global imbalances, and widening stock imbalances add to the downside risks.
Such divergences and uncertainly can only end badly and engender potential financial market turmoil.
Mark Sobel is US Chairman of OMFIF. He is a former Deputy Assistant Secretary for International Monetary and Financial Policy at the US Treasury and until earlier this year US representative at the International Monetary Fund.