David Lipton, first deputy managing director of the IMF, gave a pretty sobering speech about the outlook for the global economy in Washington overnight.
“The IMF’s latest reading of the global economy shows once again a weakening baseline,” he said. “Moreover, risks have increased further, with volatile financial markets and low commodity prices creating fresh concerns about the health of the global economy.”
This is not some fund manager with a bearish investment thesis. It’s an executive at the IMF.
Lipton said the global recovery was weak and warned dislocation in markets was having a real world impact of lowering global trade and capital flows.
“What may be most disconcerting is that the rise in global risk aversion is leading to a sharp retrenchment in global capital and trade flows. Last year, for example, emerging markets saw about $200 billion in net capital outflows, compared with $125 billion in net capital inflows in 2014,” Lipton said.
Certainly that is what was reflected in the weakness in Chinese export data released yesterday. It is also what we have seen in the Japanese trade data over recent months.
The slowdown in trade speaks to the overall slowing in global growth that has Lipton and the IMF worried.
Two things are troubling Lipton:
First, because protracted low global demand, and adverse feedback loops between the real economy and markets may generate additional deflationary pressures, putting us at risk of secular stagnation. Second, and equally relevant, is that labor supply and labor productivity growth have fallen considerably over the past decade, further aggravating these adverse dynamics.
This means “the downside risks are clearly much more pronounced than before, and the case for more forceful and concerted policy action, has become more compelling,” Lipton said.
Central banks know that. Some, including the ECB and Bank of Japan, have pushed rates into negative territory.
But Lipton warns this strategy is unlikely to get the traction its proponents hope. He suggests perhaps the whole point is really about weakening currencies to aid growth.
“With negative policy rates taking hold in some countries, the scope for monetary policy to boost domestic demand further is limited, so its remaining potency may lie mainly in weakening currencies and attracting demand from the rest of the world in a way we should avoid,” Lipton said (our emphasis).
Which means governments need to get busy and act through fiscal policy.
This means spending taxpayers’ money.
Lipton said he had two things in mind when it comes to how governments can use fiscal policy to get their own economies – and that of the world – moving again:
First, making fiscal policies more growth-friendly, by changing the composition of budgets; second, countries with fiscal space should use it to boost infrastructure investment, for example. This is particularly the case in advanced economies given, as I said a moment ago, that the need to build resilience in emerging markets will in many cases require sustained adjustments that will likely prove pro-cyclical. So, the burden to lift growth falls more squarely on advanced economies.
He concluded: “Global economic recovery continues, but we are clearly at a delicate juncture, where risk of economic derailment has grown.”
That’s gloomy enough but having been at the recent G20 meeting in Shanghai it seems Lipton, and no doubt his colleagues at the IMF, sense nothing will be done because he ends his speech rather more pessimistically. He says:
Now is the time to decisively support economic activity and put the global economy on a sounder footing. This requires some tough choices, with advanced economies in particular needing to step up to the plate through the three-pronged approach I have described, as well as measures to make the global financial system more efficient and resilient.
Winston Churchill said, “I never worry about action, but only inaction.” This is one of those moments where action — concerted action — is needed.
That’s a strong message from a senior IMF bureaucrat. And it sounds like one borne of frustration with developed market policy makers.
But if monetary policy is failing to lift growth, if negative rates won’t work, and if governments are prone to inaction then there is little prospect growth will improve anytime soon.
It also highlights the recent risk rally in stocks and commodities may be resting on very unstable ground.