Government life support is the only thing stopping the economy from sliding into another Great Depression
‘The rising spectre of protectionism and the outside risk of outright trade warfare is a deep-rooted threat to the future’
Nobody likes uncertainty, least of all financial markets, so any kernel of optimism must be a welcome treat for global investors, especially when they have an abundance of ready cash to put to work. So the latest prognosis by the International Monetary Fund noting consistently better economic news and a brightening global outlook should be music to investors’ ears.
Except that the IMF’s latest World Economic Outlook (April 2017) seems to ring a discordant note, especially in its title “Gaining Momentum?” The inclusion of the question mark is a big giveaway. It seems the IMF hardly believes its own contention that things are potentially getting better.
To be fair, the IMF has a duty to sound more upbeat as global authorities have tried “every which way and loose” to get the world economy back on its feet again in the past eight years since the global financial crash first hit, using all sorts of monetary creation and fiscal wizardry.
The problem boils down to whether consumers, businesses, investors and governments actually believe the hype and are prepared to invest and spend in a bigger way. The IMF is hoping for a brave new world of global gross domestic product growth picking up to 3.5 per cent this year and 3.6 per cent in 2018 as long as economic confidence continues to build.
But it is a “big ask” believing it, especially as the IMF reels out its list of reasons why recovery prospects remain so weak and muted right now. Critically, the IMF points out “significant downside risks continue to cloud the medium term outlook” and these may be intensifying.
On the bright side, the IMF is right to point out that the US recovery continues to do well, with the economy approaching close to full employment. Europe has responded better than expected to the European Central Bank’s monetary medicine. China has a reasonable chance of meeting its 6.5 per cent growth target this year too. So, hopefully, the good news should spread.
Unfortunately, the negatives continue to outweigh the plus-points by a wide margin. Even the IMF has to acknowledge the economic outlook remains vulnerable to a long and daunting list of downside risks.
The main worry is the global economy is still not all-clear from the 2008 crash. Extensive balance sheet restructuring, debt deflation and fiscal retrenchment mean world recovery remains disproportionately dependent on a supply of cheap money. As the US Federal Reserve drags US and global interest rates back to “normal”, it means crunch time for borrowers, especially for the debt-stretched emerging economies.
The rising spectre of protectionism and the outside risk of outright trade warfare is a deep-rooted threat to the future. The crisis in effective global leadership, US policy uncertainties and growing geopolitical risks all add up to a disturbing ragbag of dangers dragging on future confidence and activity.
The inequality of wealth around the world, the growth disparity between rich and poor nations, muted recovery in real incomes in the advanced and developing nations and the threat of technology to future employment growth all add up to a much less certain world. No wonder the IMF refuses to celebrate.
In truth, global economic recovery still remains on life support and in a near vegetative state. It is only thanks to the major central banks’ quantitative easing and near-zero interest rates that the world has avoided going into cardiac arrest. The crisis for sustainable recovery comes once life support is withdrawn and the patient is forced to stand on its two own feet. Global recovery could easily trip over.
There are alternatives but it will depend on much more effective global economic policy initiatives ahead. World leaders need to deal with the crisis of rising inequality and social polarisation. According to Oxfam figures, the world’s eight richest billionaires control the same wealth between them as the poorest half of the globe’s population. This needs to be addressed fast.
It is no use central banks plying the super-rich, wealthy multinationals, hedge funds and fast money speculators with cheap money to leverage even better advantage, if the world’s needy and less well-off nations continue to struggle.
The world needs a much fairer distribution of wealth and productive resources around the world, it needs better economic management and it needs stronger sustainable growth shared by all. Once that happens then maybe the IMF can crow about it.
David Brown is chief executive of New View Economics