How to Help, Not Hinder Global Growth

IMF Blog, June 5, 2019

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Author: Christine Lagarde
Date: June 5, 2019
Context: G-20 finance ministers and central bank governors meeting in Fukuoka; Fukuoka described as Japan’s “startup city” and example of embracing trade, innovation, and openness.

IMF cut its global growth forecast to 3.3 percent in 2019, largely because of temporary, country-specific factors and the tangible effects of trade tensions.
IMF projected a pickup in growth in the second half of 2019 and a further acceleration to 3.6 percent in 2020, the same growth rate as in 2018.
Policy responses supporting stabilization:
- More patient pace of monetary normalization by the US Fed and the European Central Bank.
- Increased fiscal stimulus in China.
Recent data: while first-quarter activity disappointed in parts of emerging Asia and Latin America, growth was stronger than expected in the United States, the euro area, and Japan.

Uncertainty over whether first-quarter momentum in advanced economies will hold and whether improvements in stressed economies will materialize or take longer.
Potential adverse impacts from a no-deal Brexit and recent increases in oil prices.
Underlying vulnerabilities:
- Elevated corporate debt levels that could trigger disruptive capital outflows from emerging markets if financial conditions shift suddenly.
- Disappointing medium-term growth prospects due to population aging, slow productivity, and excessive economic inequality.

Estimated impacts of tariffs:
- Recently announced and envisaged US-China tariffs could subtract about 0.3 percent from global GDP in 2020, with more than half of the impact stemming from business confidence effects and negative financial market sentiment.
- Overall, US-China tariffs—including those implemented last year—could reduce global GDP by 0.5 percent in 2020.
- This 0.5 percent reduction amounts to a loss of about US$455 billion.
Distributional effects:
- Protectionist measures are hurting growth and jobs, making tradable consumer goods less affordable, and disproportionately harming low-income households.
Policy prescription on trade:
- Remove recently implemented trade barriers and avoid further barriers in whatever form.

Immediate priority: resolve current trade tensions and modernize the international trade system.
Areas for strengthening WTO rules: subsidies, intellectual property, and trade in services.
Potential gains from liberalizing services:
- IMF research shows that liberalizing trade in services could add about US$350 billion to global GDP in the long run.
Additional cooperative priorities:
- Reform international corporate taxation.
- Strengthen the global financial safety net.
- Tackle climate change.

Fiscal constraints:
- High public debt and low interest rates have left many countries with limited policy room, requiring carefully calibrated fiscal policies balancing growth, debt sustainability, and social objectives.
Addressing adjustment costs:
- Policies needed to manage dislocations from trade and technological innovation and to support those left behind.
Structural reform agenda:
- Lower barriers to entry in retail and professional services.
- Encourage greater participation of women in the workforce.
- Estimated payoff: jointly implemented structural measures could boost G-20 GDP by 4 percent in the long term.
Structural reforms also increase resilience and inclusiveness of growth.

Contingency planning: prepare for the next downturn by being ready to use all policy tools to maximize combined effect.
Policy mix in a downturn:
- Support demand through decisive monetary easing and fiscal stimulus wherever possible.
- Use supportive policies to boost the impact of structural reforms where demand is weak.
Simulation findings from IMF G-20 note:
- Under a scenario where all policy tools are used, G-20 output recovers significantly faster and more sustainably.
- Policy coordination across countries produces reinforcing positive spillovers; if all countries act decisively, the collective benefit is larger.

International cooperation is critical now, not only in a downturn, because the global economy faces a delicate moment.
For G-20 nations, the imperative is to “help, not hinder” the expected pickup in growth by removing stumbling blocks and harnessing openness.
The “Fukuoka spirit” of openness can help set the global economy on a more durable and inclusive path.

Source: How to Help, Not Hinder Global Growth — Christine Lagarde, June 5, 2019.