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As the Group of Twenty industrialized and emerging market economies (G-20) finance ministers and central bank governors gather in Riyadh this week, they face an uncertain economic landscape.
After disappointing growth in 2019, we began to see signs of stabilization and risk reduction, including the Phase 1 U.S.-China trade deal. In January, the IMF projected growth to strengthen from 2.9 percent in 2019 to 3.3 percent in 2020 and 3.4 percent in 2021. This projected uptick in growth is dependent on improved performance in some emerging market and developing economies.
Monetary and fiscal policy have been doing their part. In fact, monetary easing added approximately 0.5 percentage points to global growth last year. Forty-nine central banks cut rates 71 times as part of the most synchronized monetary action since the global financial crisis.
But the global economy is far from solid ground. While some uncertainties have receded, new ones have emerged. The truth is that uncertainty is becoming the new normal.
Working together, we can take the necessary steps to reduce uncertainty and put the global economy on more solid footing.
The coronavirus is our most pressing uncertainty: a global health emergency we did not anticipate in January. It is a stark reminder of how a fragile recovery could be threatened by unforeseen events. There are a number of scenarios, depending on how quickly the spread of the virus is contained. If the disruptions from the virus end quickly, we expect the Chinese economy to bounce back soon. The result would be a sharp drop in GDP growth in China in the first quarter of 2020, but only a small reduction for the entire year. Spillovers to other countries would remain relatively minor and short-lived, mostly through temporary supply chain disruptions, tourism, and travel restrictions.
However, a long-lasting and more severe outbreak would result in a sharper and more protracted growth slowdown in China. Its global impact would be amplified through more substantial supply chain disruptions and a more persistent drop in investor confidence, especially if the epidemic spreads beyond China.
Even in the best-case scenarios, however, the projected rate of global growth is still modest in too many parts of the world.
And over the medium term, growth is expected to remain below historical averages.
In this context, while some uncertainties—like disease—are out of our control, we should not create new uncertainties where we can avoid it.
I believe there are three areas where the finance ministers and central bank governors can make progress in providing more certainty about future actions during the G-20 meetings in Saudi Arabia: Trade, Climate, and Inequality.
Building a Better Global Trading System
The Phase 1 trade deal between the United States and China eliminated some of the immediate negative consequences for global growth.
We estimate the deal will reduce the drag from trade tensions on the level of GDP in 2020 by 0.2 percent—about one quarter of the total impact.
Why not a larger reduction ? The deal only addresses a small share of the recently imposed tariffs and specifies minimum increases in China’s imports from the United States. These types of bilateral managed trade arrangements have the potential to distort trade and investment while harming global growth. In fact, our estimates suggest that the managed trade provisions cost the global economy close to $100 billion dollars.
There are also broader concerns. The agreement leaves many of the underlying issues between China and the United States unaddressed. Further, the world needs a modern global trading system that can unleash the full potential of services and e-commerce while protecting intellectual property rights.
And tackling trade is only a start. The global economy will continue to encounter major shocks if we fail to address another urgent global challenge: climate change.
Tackling our Climate Crisis
The human toll of climate change confronts us every day. Think of the recent Australian wildfires. The economic costs confront us too. Just one example: the damages from Hurricane Maria amounted to over 200 percent of Dominica’s GDP and over 60 percent of Puerto Rico’s GDP.
IMF staff estimates, released today, show that a typical climate-related natural disaster reduces growth by an average of 0.4 percentage points in the affected country in the year of the event.
Moreover, these types of events are becoming more frequent, particularly in the poorest countries and those least able to cope with the impact.
What steps can policymakers take? Mitigation and adaptation.
A recent IMF staff study shows that global oil demand is expected to peak in the coming decades. That is why the Gulf Cooperation Council, and all members of the G-20, are right to put a renewed focus on finding the path forward on diversification.
Investments in clean energy and resilient infrastructure can yield what I call a triple dividend: averting future losses, delivering innovation gains, and creating new opportunities for those most in need.
Additional revenues generated from carbon taxes, for example, could be used to cut taxes elsewhere and fund assistance to affected households, or finance spending that can help close some of the gaps in our societies. For countries and communities at highest risk of climate disasters investing in adaptation is both urgent and cost-effective. Analysis by the Global Commission on Adaptation suggests the benefits of such investments could far outweigh their cost.
This brings me to my third and final area of focus for the G-20: reducing inequality.
Reducing Inequality
Across much of the OECD and the G-20 countries, income and wealth inequalities remain persistently high. There is a significant opportunity gap when it comes to gender, age, and geography. We know these gaps quickly can become chasms that fuel uncertainty about the future, distrust in government, and ultimately contribute to social unrest. This week, the ministers can put a renewed focus on raising living standards and creating better paying jobs.
In support of the G-20, the IMF, in collaboration with the World Bank, is identifying key areas where access to opportunities can be increased. In particular, investing in high-quality education, R&D, and digitalization. The timing is right. The current low interest rate environment means that some policymakers may have additional money to spend. Of course, that advice will not work everywhere. Public debt is near record levels in many places. So in countries with a high debt-to-GDP ratio, fiscal restraint continues to be warranted.
However, reducing deficits—when needed—should always be done in a way that protects essential social spending. This is how countries can increase access to opportunities for all and build a stronger foundation within their own economies.
Conclusion
In the 14th century, the Arab thinker and historian Ibn Khaldun wrote about the concept of strength in solidarity and the power of joint purpose. He described the bond between people that can form a community. As G-20 ministers and governors meet this week in Saudi Arabia, I hope they consider the wisdom of Ibn Khaldun. Working together, we can take the necessary steps to reduce uncertainty and put the global economy on more solid footing.
