Deja Vu? Imagine what a new president of the United States is about to inherit? Terrifying…
The IMF Is Sounding the Alarm. Is Anyone Listening?
WSJ: The International Monetary Fund is sounding louder and louder alarms about the state of the global economy. The problem is, few major economies seem to be hearing them.
“The IMF’s latest reading of the global economy shows once again a weakening baseline,” the fund’s No. 2 official, David Lipton, warned Tuesday in a speech to the National Association for Business Economics.
While the world economy is still expanding, he said, “we are clearly at a delicate juncture, where risk of economic derailment has grown.”
The IMF alerted finance ministers and central bank governors from the Group of 20 largest economies gathered in Shanghai late last month, signaling it would likely downgrade its outlook for the global economy in April.
IMF Managing Director Christine Lagarde said a coordinated effort was needed, urging governments with room in their budgets to ramp up spending and all countries to accelerate delivery of long-promised economic overhauls.
Unlike the G-20’s massive joint-stimulus effort in 2009 to combat the financial meltdown wreaking havoc across the globe, IMF members are at odds about the severity of the problem and how to fix it.
“We are strictly against announcing publicly that the G-20 is preparing a stimulus program,” German officials privately told other countries as the group drafted its joint communiqué.
The IMF fears such an attitude risks jeopardizing the global economic expansion.
Mr. Lipton, at his speech Tuesday, cited a World War II-era quote by Winston Churchill: “I never worry about action, but only inaction.”
Part of the problem is a growing concern that policy makers are running out of ammunition or have lost the resolve to deploy growth-reviving measures.
“For the sake of the global economy, it is imperative that advanced and developing countries dispel this dangerous notion by reviving the bold spirit of action and cooperation that characterized the early years of the recovery effort,” Mr. Lipton said.
The IMF calls come as the Organization for Economic Cooperation and Development said leading indicators already suggest global growth will slow in the coming months. And the Bank for International Settlements cautioned against diminishing returns for central banks as they keep pushing easy-money policies to boost growth, including “great uncertainty” about navigating deeper into uncharted waters of negative interest rates.
There are few signs policy makers are shifting into higher gear. “There’s a great deal of economic uncertainty in the world, but there’s not a crisis and it would not be reasonable to expect a crisis response,” a senior U.S. Treasury official said during the recent meeting.
While the IMF is pushing the G-20 to boost spending, it is not a call to do so at the expense of monetary policy. The fund has long pushed the Federal Reserve to delay its planned rate increases and asked the European Central Bank to rev up its stimulus efforts.
Mr. Lipton worries premature withdrawal of central bank support could pitch the global economy into a deflationary death trap.
Then, “vicious and self-reinforcing dynamics” would plague the world in the form of higher real interest rates, falling output, building debt and higher unemployment, he said. Such effects are “notoriously difficult to combat once they become entrenched.”
If recent history is any guide, the IMF may once again have to turn its downside scenario for the global economy into its baseline.
The trouble with the World Economic Forum is that it has a propensity to become something of an echo chamber. Rather than promoting a plurality of different views, ideas and sentiments, the mood tends to get focused on a single, self-reinforcing consensus which is endlessly repeated and passed around, as if trending on social media. So it is with financial panics, which have an unnerving tendency to coincide with the annual conference in Davos. I’ve seen it happen on a number of occasions, most memorably in the run up to the invasion of Iraq, when the sense of fear for the future among financiers and policymakers was palpable.
It happened again in early 2009, in the depths of the banking crisis, when an end-of-days mentality hung over the conference. Somehow or the other, Davos amplifies these panics rather than calming them. This year threatens to be little different. Nobody here knows quite what to make of the latest stock market sell-off, and that, indeed, is part of the problem, for uncertainty breeds fear of loss and can easily degenerate into a collective dash for the exit. The danger is that we talk ourselves into something a good deal more serious than it should be.
There is no particular trigger for the latest panic. Most of, if not all, the concerns that underlie it have been with us for some time now — the apparent incompetence of once omnipotent Chinese policymakers in the face of a slowing economy, the collapsing oil price and the growing sense of geo-political instability that accompanies it. As for the rise in American interest rates, that happened a month ago, and had been widely signalled by the Federal Reserve for more than a year beforehand. Yet it is only now that this slight tweak to monetary policy has transmogrified in the eyes of investors from a benign and well-flagged response to an accelerating US economy into a grievous policy mistake that threatens to destabilise the world economy.
So what are we dealing with here; a long-overdue adjustment to asset prices unduly inflated by years of central bank money-printing, or a signal of tough times ahead for the real economy? It’s not hard to make the case for financial Armageddon; certainly, there are plenty of people here only too willing to imagine the worst. Start with the plunging oil price, which ought to be positive for the big consumer economies of the West — given that it puts more money in people’s pockets for spending on other things.
One worry, though, is that it is already causing such a hiatus in oil industry investment that today’s glut will in short order turn to famine, causing the price to surge anew. Back in the late Nineties, the Economist ran a cover on why the oil price would remain at $5 a barrel “for ever”. But as everyone knows, nothing is for ever and little more than 10 years later, it had risen to nearly $150.
The same cycle is being repeated today, with investment cut to a level that, in the long term, will leave supply more than a third lower than present demand. Markets are now anticipating the cooling effect of these higher prices to come. Another worry is that the low oil price will end up bankrupting Saudi Arabia, causing further chaos in an unstable region. Isil taking control of some of the world’s biggest oil reserves scarcely bears thinking about.
Meanwhile, a strong dollar in combination with collapsing commodity prices is threatening a wave of corporate bankruptcies in a world awash with dollar debt. To this list of woes must be added continued worries over China’s transition from to a consumer-led economy. Since the financial crisis, China has been the key source of growth in an otherwise stagnant global economy, but now this progress seems to have stalled. Stories abound of extreme unhappiness within the notoriously secretive Chinese high command. There is even talk of attempted coups. These scenarios may seem far-fetched, but what is undeniable is that all these concerns play into a world of extreme flux. Investors may crave stability and predictability. But for now, these are in lamentably short supply.
