The world’s central banks are wasting scarce ammunition in an attempt to compensate for policy blunders that have left the global economy at its weakest since the deep recession of a decade ago, the International Monetary Fund has warned.
In a downbeat assessment, the IMF used its half-yearly World Economic Outlook (WEO) to cut its forecast for growth in both 2019 and 2020, adding that stimulus provided by central banks would mitigate the damage caused by protectionism.
The Washington-based IMF said it expected global growth to be 3% in 2019 – down from 3.6% last year and a 0.3 percentage point cut from its April forecast.
Although the IMF predicted growth would pick up to 3.4% next year, that represented a downgrade from the 3.6% pencilled in six months ago. Faster growth in 2020 would depend on a better performance by a number of troubled emerging countries – such as Argentina and Turkey – the IMF said.
Gita Gopinath, the IMF’s economic counsellor, said that without the interest rates cuts announced by central banks in both developed and developing countries in recent months its growth forecast would be 0.5 points lower in both 2019 and 2020.
She added that the growth boost from the stimulus “helped offset the negative impact” of the US and China trade conflict that has become more serious since it began in March 2018. Gopinath said the tit-for-tat tariff action would reduce global growth by a cumulative 0.8 percentage points by the end of next year.
Gopinath said the IMF hoped the recent trade truce announced by Washington and Beijing would result in a lasting peace. If protectionist measures due to come into force this month and in December were scrapped the damage to the global economy would be closer to 0.6 points rather than 0.8 points.
“With central banks having to spend limited ammunition to offset policy mistakes, they may have little left when the economy is in a tougher spot,” Gopinath said in the WEO’s foreword.
What is the IMF?
The International Monetary Fund, created in 1945, is an organisation of 189 countries based in Washington DC. It is governed by, and accountable, to member countries.
Its goals are to ensure the stability of the international monetary system (exchange rates and international payments), to secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty.
The IMF has bailed out scores of countries over the years, including the UK in 1976 when the minority Labour government borrowed £2.3bn from the fund to stabilise the value of the pound; Iceland in 2008; and Greece in 2010, 2012 and 2015.
The number of bailouts of African countries has also increased in recent years as states became more vulnerable to commodity price crashes.
The IMF was conceived at a UN conference in Bretton Woods in the US in July 1944 to build a framework for economic cooperation to avoid the devaluations that contributed to the Great Depression of the 1930s.
Most funds for IMF loans are provided by members via payments based on their position in the world economy, although the IMF can also borrow. Its decision-making also reflects members' relative influence. The Fund, as it is known, is one of the world’s biggest holders of gold.
Despite the impact of protectionism, the US is forecast to be the fastest growing of the G7 industrial nations this year, at 2.4%. No other G7 country is expected to have a growth rate of more than 2%.
Britain’s growth rate is predicted to be 1.2%, the same as France, but stronger than Japan (0.9%), recession-threatened Germany (0.5%) and Italy (0%). The eurozone has been affected by falling demand for its exports, with Germany suffering the biggest IMF downgrades.
The IMF said its forecasts for the UK and the eurozone were still based on a deal between London and Brussels but added that the outcome remained uncertain at the time the WEO was being written in early September.
Gopinath repeated the warning – first given by the IMF six months ago – that a no-deal Brexit would reduce growth in the UK by between 3% and 5% over two years, depending on the level of disruption.
The WEO’s forecasts for the UK in 2019 and 2020 have remained unchanged since April, with the IMF saying that the modest growth reflects the combination of a negative impact from weaker global growth and ongoing Brexit uncertainty and a positive impact from higher public expenditure announced in the recent spending review.
Gopinath said subdued growth was a consequence of “rising trade barriers; elevated uncertainty surrounding trade and geopolitics; idiosyncratic factors causing macroeconomic strain in several emerging market economies; and structural factors, such as low productivity growth and ageing demographics in advanced economies.
“It is important to keep in mind that the subdued world growth of 3% is occurring at a time when monetary policy has significantly eased almost simultaneously across advanced and emerging markets. The absence of inflationary pressures has led major central banks to move pre-emptively to reduce downside risks to growth and to prevent de-anchoring of inflation expectations, in turn supporting buoyant financial conditions.”
Gopinath added that there was too much reliance on central banks and singled out Germany as a country that could use fiscal policy – tax cuts and higher public spending – to boost activity.
Although global economic cooperation is currently at a low ebb, Gopinath said an internationally coordinated fiscal response, tailored to the circumstances of individual countries, could be required if growth weakened further.
