The World Economy: Moving Sideways

maury-obstfeld-weo_220x150By Maurice Obstfeld

Versions in: عربي (Arabic), 中文 (Chinese), Français (French), 日本語 (Japanese), Русский (Russian), and Español (Spanish)

A return to the strong, sustainable, balanced, and inclusive growth that Group of Twenty leaders called for at Hangzhou in September still eludes us. Global growth remains weak, even though it shows no noticeable deceleration over the last quarter. The new World Economic Outlook sees a slowdown for the group of advanced economies in 2016 and an offsetting pickup for emerging and developing economies. Taken as a whole, the world economy has moved sideways. Without determined policy action to support economic activity over the short and longer terms, sub-par growth at recent levels risks perpetuating itself—through the negative economic and political forces it is unleashing.

We project global output growth at 3.1 percent in 2016 and 3.4 percent in 2017—the same as in early July, shortly after the United Kingdom’s “Brexit” vote to leave the European Union. Within this broad outlook, however, we have slightly marked down 2016 growth prospects for advanced economies while marking up those in the rest of the world. Prospects for 2017 are unchanged for both country groupings. Over the medium term, while we expect that advanced economies will continue along a disappointingly low growth path, emerging market and developing economies should accelerate as most of the large countries with currently shrinking economies stabilize and return to their longer-term growth paths.

Even this more granular view conceals important differences within country groups. U.S. growth has disappointed in 2016, but is partially offset by smaller upside surprises in Europe and Japan. Outside of the advanced economies, emerging Asia has done better, whereas sub-Saharan Africa as a whole has been dragged down by its big commodity exporters despite a number of smaller countries benefiting from lower commodity prices.

Why not be satisfied with recent growth rates? Other things being unchanged, the trend shift in global output away from mature and relatively slow-growing economies, toward emerging and developing economies, should raise global growth over time. But this has not happened.

Compared to the 1998–2007 averages, long-term potential growth is now projected to be lower in all regions, and current growth rates are lower still in much of the world, notably in emerging market and developing economies. Admittedly, some of this long-term growth decline reflects demographic trends as well as developments during the earlier period that could not be sustained: the initial burst in productivity due to the information and communications technology revolution, China’s growth surge, and a global financial up-cycle that culminated in a severe worldwide crisis. Yet negative output gaps remain widespread, and the crisis has left a cocktail of interacting legacies—high debt overhangs, non-performing loans on banks’ books, deflationary pressures, low investment, and eroded human capital—that continue to depress potential output levels. Because investors and consumers become more cautious when they fear income growth may lag for longer, realized growth can fall as well.

These self-fulfilling mechanisms could be reversed were global demand higher. But the policy response so far has been unbalanced in relying excessively on central banks. Markets fear that policy has no room to counter the next big negative economic shock.

Then there is the gathering political fallout from persistently low growth. The slow and incomplete recovery from crisis has been especially damaging in those countries where the distribution of income has continued to skew sharply toward the highest earners, leaving little room for those with lower incomes to advance. The result in some richer countries has been a political movement that blames globalization for all woes and seeks somehow to wall off the economy from global trends rather than engage cooperatively with foreign nations. Brexit is only one example of this tendency.

In short, growth has been too low for too long, and in many countries its benefits have reached too few—with political repercussions that are likely to depress global growth further.

These concerns highlight the risks to our projections, which remain tilted to the downside. The presumed recovery in 2017 and beyond, could be derailed by several, possibly interacting developments: a bumpy transition in China, a sharp further fall in commodity prices, a tightening in global financial conditions, or a sharp hike in trade barriers. Geopolitical tensions could flare up, adding to the humanitarian crises already afoot in the Middle East and Africa and further complicating the policymaking environment.

Comprehensive, consistent, and coordinated

An upside outcome would be the adoption by many countries of comprehensive, consistent, and coordinated policies that exploit synergies across instruments, time, and countries to boost growth and make it more inclusive. This strategy was explained in a Staff Discussion Note that we issued last week. Comprehensive policies are three-pronged: they deploy structural and fiscal policy in support of monetary policy, while monetary policy, in turn, maximizes the expansionary effects of structural reforms and active fiscal policy. Consistent and well-communicated policies harness the power of stabilizing expectations. Coordination among countries—as with the 2014 Brisbane Action Plan on structural measures—confers beneficial spillovers, making the whole greater than the sum of its parts. If widely adopted, this general approach, based on the three policy prongs the IMF has been recommending, can raise growth now. It could also defend against a negative global shock, limiting the resulting damage to fiscal positions, if carried out on a larger scale.

Among structural policies, a renewed commitment to lowering trade barriers is especially important, in contrast to current trends. At the same time, governments must recognize the need to develop labor-market resilience, to lower barriers to entry in product and service markets, and to ease adjustment for those most vulnerable to the dislocations from technology, trade, and structural reforms. Here too, policymakers can send the clearest message and have the biggest effect through coordinated action.

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