Global economic growth ‘sliding back into the morass’
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The global economy is faltering again with growth rates “sliding back into the morass [they have] been stuck in for some time”, according to the Brookings Institution-Financial Times tracking index.
In a publication ahead of this week’s annual meetings of the International Monetary Fund and World Bank, the results will reinforce fears that many countries have become caught in a vicious circle of low growth, popular discontent and a backlash against trade and openness, resulting in more economic weakness.
The annual meetings will encourage policymakers to pursue inclusive and faster global growth as international organisations, finance ministers and central bank governors seek to reassure the public they can co-operate and that they have the necessary tools to break five years of economic disappointments.
Hanging over the meetings is the fear that the failure to improve living standards in advanced and emerging economies was important in the UK’s vote to leave the EU, may propel Donald Trump to the US presidency and will strengthen the hands of populists such as Marine Le Pen in France.
The Brookings-FT Tiger index — tracking indices for the global economic recovery — suggests the world economy is still struggling to grow strongly. The index compares many separate indicators of real activity, financial markets and investor confidence with their historical averages for the global economy and for each country separately.
While the overall growth index for emerging markets has improved from the lows of late 2015 and there are signs of an end to recessions in Russia and Brazil, the level of growth remains far below historical averages. Sluggishness also continues to haunt advanced economies, which have settled into a pattern of positive but weak growth in recent years.
The same picture of a global economy failing to meet the expectations of citizens is likely to emerge from the IMF’s updated forecasts on Tuesday in its World Economic Outlook. Christine Lagarde, the fund’s managing director, warned last week of a “weak and fragile” economy that was encouraging “economic malpractice” in the form of restricting trade and reducing openness, although she did not directly name either Mr Trump or the Brexit vote.
The IMF is likely to say the world economy is growing at a 3 per cent growth rate, similar to its average over the past 40 years. However, with faster growing emerging markets now accounting for more than half the global economy, so significantly higher global growth rates are needed for improvements in living standards to match historic averages in individual countries.
Professor Eswar Prasad, an economist at Brookings, said most of the world could be described as having “weak investment, stagnant productivity and tepid private sector confidence”.
With little prospect of a spontaneous recovery or strong new stimulus, he said “a strong adverse feedback loop has set in with low growth, fragile business and consumer confidence, low interest rates, financial system stresses, trade tensions, and political instability feeding into and reinforcing each other”.
Signals for growth in the US have been mixed, leading to uncertainty over whether the Federal Reserve will feel able to nudge interest rates higher by the end of the year. Meanwhile, the European economy remains sluggish with high unemployment and inflation remaining too far below the 2 per cent target. Although China’s economy has stabilised this year, its growth remains dependent on extremely rapid growth in lending.
Prof Prasad urged policymakers outside central banks to help improve the outlook with more aggressive fiscal stimulus, deregulation and greater openness to trade. “The policy vacuum outside central banks has dented confidence, depressed domestic demand, hurt world trade and remains a drag on global economic activity.”
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