Somber mood afflicts the IMF, World Bank annual meetings
The mood was rather somber when finance ministers, central bank governors and bankers met for the Annual Meetings of the IMF and the World Bank Group.
Officials were careful to avoid the r-word, because the IMF would only define a recession when global growth drops to 2.5 percent or below. The rationale is that under such a scenario, enough leading economies would be in decline to justify the classification.
There was no doubt however that not all is well in the global economy. Growth is the lowest since 2009 at the height of the financial crisis. There were several downward revisions since the lofty days of January 2018 when both the IMF and the World Bank forecasted synchronised growth of 3.9 percent across the globe. These predictions have been gradually reduced. Now we stand at 3 percent for the IMF and 2.6 percent for the World Bank — perilously close to the precipice. But the IMF expects positive change for the new year, resulting in a growth forecast of 3.4 percent for 2020.
In her opening remarks, the new IMF Managing Director Kristalina Georgieva talked of a “synchronized slowdown driven by trade conflicts Brexit and geopolitical tensions.” This echoed the mood in the room. Her priorities were to build a stronger trading system, use monetary policy wisely, enable fiscal policy to play a more central role, encourage countries to look at structural reforms and promote stronger international cooperation beyond trade.
These are all excellent aspirations. However, implementing them will not be easy as it takes the will of political leaders across the world to act in lockstep.
Sadly we are in a position where bilateralism is taking over and the post-war multilateral architecture is undermined step by step.
Presently, it looks as though the phased trade negotiations between the US and China are on the right path, if we are to believe recent statements coming out of both camps. However, as we all know, a tweet from US President Donald Trump or a statement from Chinese President Xi Jinping can derail the negotiations in a split second. We have been there before in April when a resolution on the conflict looked promising — alas, it was not.
But there is more to global trade than the US and China. Dark clouds of trade conflicts are gathering over the Atlantic. The World Trade Organization (WTO) launched a parting shot to trade tensions when it allowed the US to levy $7.5 billion in tariffs to compensate for illegal EU subsidies to Airbus. The Europeans will now go after Boeing and Trump has repeatedly threatened to put tariffs on European cars. This could well develop into the next theater of global trade wars.
These trade conflicts have broad, if not generational, impacts on the global economy as they force companies to realign their supply chains.
So much for the manufacturing sector. Services, which constitute a big part of economic activity in many economically developed economies, have so far held up reasonably well, but the first signs of a slowdown can be seen.
As for monetary policy, while the US Federal Reserve has the bandwidth to lower rates, it becomes more problematic for the European Central Bank and the Bank of Japan, who are already in negative interest rate territory, which is hard on their banks, pension funds and savers. Georgieva was right to highlight the danger of too much debt accumulating in the system due to the “lower for longer” interest rate climate. She was also correct in pointing out that monetary policy alone cannot heal all economic wounds. It needs to be supported by fiscal policy, especially in countries like Germany who have debt capacity.
All in all, the economic outlook is far from rosy, which will impact all countries. GCC economies who heavily rely on oil are particularly affected by trade wars and the localization of supply chains. There is always the question of which level of the oil pice is required to balance the budget. Their sovereign wealth funds are also exposed to the ups and downs of equity and debt markets, which tend to do better when the outlook is positive.
Georgieva set the right priorities. Sadly we are in a position where bilateralism is taking over and the post-war multilateral architecture is undermined step by step. One tweet or a wayward vote in the Hose of Commons can derail world trade or Brexit. In that context, it is vital that we take care of our multilateral development banks like the IMF, the World bank, the WTO and the various development banks.