IMF drops growth forecasts again

by Chris Becker

As the world’s elite – besides Donald Trump who is holed up in his McMansion – descend upon Davos for the World Economic Forum, the IMF is out with an update to its growth forecasts. The timing could have been a bit better given the release of the Chinese 4Q GDP print yesterday, with the newswires going gaga over it.

The usual suspects are highlighted:

  • The global expansion has weakened. Global growth for 2018 is estimated at 3.7 percent, as in the October 2018 World Economic Outlook (WEO) forecast, despite weaker performance in some economies, notably Europe and Asia. The global economy is projected to grow at 3.5 percent in 2019 and 3.6 percent in 2020, 0.2 and 0.1 percentage point below last October’s projections.
  • The global growth forecast for 2019 and 2020 had already been revised downward in the last WEO, partly because of the negative effects of tariff increases enacted in the United States and China earlier that year. The further downward revision since October in part reflects carry over from softer momentum in the second half of 2018—including in Germany following the introduction of new automobile fuel emission standards and in Italy where concerns about sovereign and financial risks have weighed on domestic demand—but also weakening financial market sentiment as well as a contraction in Turkey now projected to be deeper than anticipated.
  • Risks to global growth tilt to the downside. An escalation of trade tensions beyond those already incorporated in the forecast remains a key source of risk to the outlook. Financial conditions have already tightened since the fall. A range of triggers beyond escalating trade tensions could spark a further deterioration in risk sentiment with adverse growth implications, especially given the high levels of public and private debt. These potential triggers include a “no-deal” withdrawal of the United Kingdom from the European Union and a greater-than-envisaged slowdown in China.
  • The main shared policy priority is for countries to resolve cooperatively and quickly their trade disagreements and the resulting policy uncertainty, rather than raising harmful barriers further and destabilizing an already slowing global economy. Across all economies, measures to boost potential output growth, enhance inclusiveness, and strengthen fiscal and financial buffers in an environment of high debt burdens and tighter financial conditions are imperatives.

The last missive is where the real story lies. Trump’s toppling of the post-war free trade order as he adopts a neo-Jacksonian foreign policy bent is being pushed back by all and sundry, in an era where populism is rising, particularly in Europe – both continental and drifting away islands.

The instability this has brought has been both too fast and illuminating as the overswing towards a neo-liberal globalism clearly needed to be reined in, but without upsetting the underlying good news that it has brought to developing nations. Billions have been lifted out of poverty and brought into a more “inclusive” global community. The richer we all get, the less war, the less pain, the wider the spoils of capitalism and technology can be spread everywhere.

But what is missing is the hollowing out of the developed world’s middle class – the same people who voted for Trump, who voted for Brexit, who vote in the populists in Italy and Greece, the yellow vest crowds in France and elsewhere. The disaffection of globalism has not been addressed adequately by any non-extreme part of the political or economic spectrum.

It may not be growth forecasts that economists and policy makers at Davos should be wary of.

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