Expect underwhelming spring meetings in Washington

Mixed and tepid global growth outlook amid irksome tectonic forces

The world’s finance ministers and central bank governors will soon descend on Washington DC for the International Monetary Fund-World Bank spring meetings. They will fret about a mixed and tepid global growth outlook and gnash their teeth about looming economic forces. Then they will return home. The Washington DC economy will prosper because of it.

The IMF’s World Economic Outlook should maintain a 3% purchasing power parity-weighted global growth handle.

In January 2024, the Fund’s 2.1% US forecast anticipated firmness in US activity, well before many other economists. The Federal Open Market Committee’s dot plot just caught up. Many US forecasts are being marked up anew. US income and labour market trends remain robust. Wealth gains, increased productivity (though too early to bank on) and immigration may be further boosting growth. Financial conditions are arguably loose.

The latest price data confirm stickiness in moving from more than 3% to 2% inflation. Wage and services prices growth is solid. Oil prices are up. Given the data, dot plot and cacophonous Federal Reserve yammering, markets long ago stopped expecting six Fed funds rate cuts this year. But prominent voices increasingly warn that the three cuts anticipated in the latest dot plot may be far too many and predictions for ‘no landing’ are being heard.

Outside the US, the growth picture is less positive

Euro area activity remains stagnant, sputtering towards another forecast markdown (Figure 1). German institutes just cut their 2024 forecast for Europe’s leading economy from 1.3% to 0.1%. Overall, the euro area is making good progress in reducing inflation and, coupled with weakness in activity and bank lending, the European Central Bank appears headed for a June interest rate cut, regardless of the Fed’s stance.

Desynchronised US and euro area growth and price performance and possible divergences in Fed and ECB reactions could spur global financial market volatility and underpin the dollar.

Figure 1. Global growth rate flat to marginally up, but picture mixed across the board

October 2023 WEO January 2024 update April 2024 WEO
Global growth 2.9 3.1 ↔↑
US 1.5 2.1
Euro area 1.2 0.9
Japan 1.0 0.9 ↔↓
Emerging market and developing countries 4.0 4.1
China 4.2 4.6 ↑?
India 6.3 6.5

Source: IMF World Economic Outlook

China is consistently meeting its growth targets. Because China targeted 2024 growth to be around 5%, higher than most estimates, forecasters may fall in line. Yet, the target’s realism is questionable – no matter the posted rate and a recent uptick – given deflationary pressures, constrained consumption, housing sector woes, stretched local government finances and the government’s unwillingness to turn on fiscal and monetary spigots due to high leverage. This is hardly a propitious environment for animal spirits.

Japan has made major progress in lifting inflation after decades of deflationary pressure, though the jury is still out on its sustainability. Cautious Bank of Japan rate actions last month were greeted somewhat surprisingly by yen depreciation. However, they occurred as US markets were cutting expectations for the number of Fed hikes, such that the change in relative monetary stances was dollar supportive.

India and Asian emerging markets are holding up well, while Latin American growth remains modest, weakened by perennial low productivity.

Nettlesome risks lurk beneath the surface with few answers

The IMF has rightly used its bully pulpit to underscore potential fragmentation costs. Fragmentation is a reality. But IMF analysis – when modelling a 7% global gross domestic product loss – depicts an admittedly extreme return to bifurcated blocs, reminiscent of the cold war.

But while fragmentation into blocs is a useful intellectual framing, even despite technological restraints and near/friend/re-shoring, China remains highly integrated into the global economy and will hardly tie its economic fate to Russia, Iran and North Korea. Firms relocating out of China change the pattern but not the level of globalisation per se – even if costs rise somewhat. Even if it was peaking, the deglobalisation chorus exaggerates. Trade-distorting barriers, subsidies and industrial policies are rising. Protectionism may surge.

China’s manufacturing trade surplus as a share of GDP is over 10% and, with weak domestic demand, the risk of China exporting overcapacity is high. The European Union is increasingly vocal about increased Chinese exports. The US Treasury has placed overcapacity high on the agenda with China.

The Joe Biden administration has largely left the previous administration’s tariffs in place, pulled back from its meagre Indo-Pacific Economic Framework and injected Buy American provisions into its laudable drive to fix infrastructure and tackle climate change. The boundaries between legitimate national security fences and protectionist yards are unclear. Presidential candidate Donald Trump is threatening to slap an across-the-board 10% global tariff and 60% tariffs on China.

Germany’s current account surplus seems to be rearing its head anew.

Geopolitics jeopardise progress on inflation and other intractable risks

Geopolitical conflicts remain an economic flashpoint, jeopardising progress in reducing inflation. Cuts by the Organization of the Petroleum Exporting Countries and Middle Eastern developments especially are boosting oil prices. The latter are also snaring global shipping lanes and creating renewed supply chain worries.

Major elections are occurring this year, none bigger than the US presidential election. Given America’s failure to legislate financial support for Ukraine and global distrust of Trump and his mercurial behaviour and economic policy orientation, US political risk is increasingly elevated and could heighten financial market volatility.

Financial stability questions are omnipresent, especially in the US given commercial real estate stresses and opaque linkages between non-financial institutions and banks. Longstanding climate change and low(er)-income country debt problems persist high on the docket, along with questions about the sustainability of rising advanced economy public debt.

Don’t expect much from the spring meetings beyond hand-wringing in the face of a mixed but overall tepid outlook and myriad risks. Hopefully, the city will be in bloom.

Mark Sobel is US Chair of OMFIF.

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