Global Growth: Too Slow for Too Long
IMF Blog, April 12, 2016
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- Authors: Maurice Obstfeld
- Published: April 12, 2016
Overview and headline findings
- Global growth "continues, but at an increasingly disappointing pace" and "has been too slow for too long."
- The new World Economic Outlook anticipates growth to accelerate slightly from 3.1 to 3.2 percent in the current year, followed by 3.5 percent growth in 2017.
- Forecasts have been progressively downgraded over time, reflecting a broad-based slowdown across countries and continuing trends highlighted in earlier World Economic Outlook editions.
- Considerable diversity in performance remains within country groups.
Main risks and channels of downside
- Financial turbulence:
- Since last summer, two distinct rounds of global financial turbulence occurred, featuring abrupt sell-offs of risky assets, heightened risk aversion, spikes in emerging-market sovereign spreads, and sharp falls in prices of oil and other commodities.
- Markets largely recovered both times, but investor reactions may have exceeded what fundamentals warranted.
- These financial swings overlie a steady trend of global financial tightening, including increasing net capital outflows from emerging markets.
- More strains could begin to appear if conditions worsen.
- Geopolitical, humanitarian, and political risks:
- Continuing violent instability in countries such as Syria is cratering their economies and driving millions of refugees to surrounding countries and Europe, creating a humanitarian disaster.
- These pressures challenge the European Union’s capacity to preserve open internal borders and have coincided with increased incidence of terrorism and a rising tide of inward-looking nationalism.
- There is a real possibility that the United Kingdom exits the European Union, damaging a wide range of trade and investment relationships.
- A backlash against cross-border economic integration in advanced countries, including the United States, threatens to halt or reverse postwar trends toward more open trade.
- Several large emerging market economies face deep contractions from internal political strife or geopolitical pressures, and a number of low-income and emerging market countries suffer El Niño-related drought or flooding.
- Macroeconomic implications:
- A weaker growth baseline raises the chance that realized risks pull the world economy below "stalling speed," risking a low-growth, deflationary equilibrium characterized by some economists as secular stagnation.
- Lack of wage growth and greater inequality have increased perceptions that growth has disproportionately benefited mobile elites and owners of capital, reinforcing inward-looking and nationalistic policies.
- Lower growth reduces the "room for error" for policymakers.
Policy framework: three-pronged approach
- Central recommendation:
- Adopt a three-pronged policy approach based on monetary, fiscal, and structural policies to both strengthen the baseline and prepare contingency plans for downside scenarios.
- Monetary policy:
- Continue monetary accommodation where deflationary pressures and negative output gaps remain.
- Monetary policy needs support from fiscal and structural policies to be effective.
- Fiscal policy:
- Infrastructure investment is attractive in a number of countries given currently low real borrowing rates.
- Fiscal support of research and development could yield notably rich payoffs.
- Balanced budget tax reforms can move fiscal policy toward more growth-friendly directions while supporting aggregate demand, labor force participation, and social cohesion.
- Structural policies:
- A range of well-sequenced structural reforms can boost potential output, especially if accompanied by complementary fiscal support.
- Pro-competitive product market reforms can be expansionary in the near term, as seen in Canada, the Netherlands, Spain two decades ago, and Italy in the 2000s.
- Further financial sector strengthening (as detailed in the Global Financial Stability Report) is essential to create a context in which monetary, fiscal, and structural policies can be more effective.
Contingency planning and international cooperation
- Policymakers should identify mutually reinforcing fiscal and structural policy packages to deploy collectively if downside risks materialize.
- Continue international cooperation to improve the functioning of the international monetary system and the stability of international finance to enhance global economic resilience.
- The outlook's downside possibilities call for an immediate, proactive response: "there is no longer much room for error." Joint recognition of shared risks and coordinated preparation can bolster confidence, support growth, and guard against a derailed recovery.
Global Growth: Too Slow for Too Long — Maurice Obstfeld, April 12, 2016.
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