Just in time for the beleaguered cosmopolitan elite’s gathering in Davos, the International Monetary Fund has issued its updated economic forecasts. It predicts global economic growth will pick up from 3.1 per cent last year to 3.4 per cent this year and 3.6 per cent next year. That accelerating trajectory is unchanged since its previous forecast in October. The detailed revisions show how the IMF has, however, made considerable changes to its forecast for the composition of global growth. The fund sees most emerging markets — Latin America, Africa, and much of Asia outside China — growing more slowly than it expected three months ago, but that is made up for by stronger growth in China and rich economies, above all the US.
There are two lessons to draw from these revisions, both much more pessimistic than most of the commentary, and the IMF itself, has allowed.
First, we need to emphasise how poor even this accelerating global growth rate is. Last year IMF head Christine Lagarde lamented how 2016 was the fifth consecutive year in which global growth was below its long-term average of 3.7 per cent. On the latest forecasts, that will remain the case for the next two years. So this growth acceleration is nothing to celebrate — it simply extends the world’s inability to grow as fast as it should in a recovery from the deepest recession in decades. And if it had not been for the previously unexpected pick-up in advanced economies, it would have been even worse.
Second, what to make of the rich world’s seemingly strengthening vim? The IMF’s upgrade clearly (just read the press conference transcript) follows other observers’ expectation that Donald Trump’s election victory presages more reflationary policies. Economists have reacted by debating how real or sustainable this is. The IMF itself focuses on the promised policies of fiscal stimulus. Meanwhile, the FT quotes Robert Shiller as attributing the better growth prospects to Trump’s ability to UNLEASH/ignite the “animal spirits” of investors (in line with his focus on the importance of storytelling for economic processes which we discussed last week). In an important op-ed, Lawrence Summers agrees with this possibility but argues that it will prove a short-term sugar rush that will end badly.
That is plausible. But there is another important implication of the upward revisions that ought to be set out more explicitly. The IMF has added half a percentage points in added cumulative growth for the next two years to its US forecast. That amounts to $100bn of goods and services produced, and the jobs and investment required to supply them, above what was forecast months ago, without any forecast of overheating. For the advanced world as a whole, the IMF expects exactly the same inflation rates as it did three months ago.
Whether this is caused by self-justifying animal spirits or the mechanics of fiscal stimulus is less important than that it is (thought to be) possible. And if it is possible now, it was possible three months ago (and a fortiori six and 12 months ago). The expectation of Trump-triggered reflationary economics, in other words, contains within it the inconvenient truth that it was in the gift of policymakers long before Trump’s ascension. And if it is possible in the US, then it is surely even more within reach in the eurozone and in Japan.
To its credit, the IMF has argued consistently for more reflationary macroeconomic policies. But it could have made the case more vigorously. Much more blame, however, falls on mainstream policymakers who have been far too timid in their attempts to restore growth across the developed world. Recently upgraded growth forecasts, from the IMF or anyone else, should be seen as a huge indictment of their failure. As Wolfgang Münchau writes, “populists could succeed simply by undoing the mistakes of the present regime”. (Not, as Münchau implies, by creating the euro, but by failing to provide macroeconomic stimulus and, in Europe, by forswearing debt restructuring.) If the Davos set are going to talk about anything, they should talk about that.
- The FT lists 10 things to look out for at the Davos World Economic Forum.
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- UK inflation continues to rise faster than expected.