Tensions mar growth prospects

Updated October 21, 2019

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The IMF presented five priorities as the Global Policy Agenda to address challenges. — Photo courtesy: IMF Twitter
The IMF presented five priorities as the Global Policy Agenda to address challenges. — Photo courtesy: IMF Twitter

The synchronised slowdown in the global economy remained the key phrase of the World Bank-International Monetary Fund (IMF) Annual Meetings 2019 in Washington DC. The newly appointed managing director kicked off the week-long consultations of the global financial and economic czars with a gloomy picture. The buzzword reverberated all along.

Managing Director Kristalina Georgieva, who has only recently moved to the IMF’s top position from the World Bank, said the Fund was now forecasting slower global growth this year and next — 3.0 per cent in 2019 and 3.4pc in 2020. In both cases, this is a downgrade from the projections in April this year.

“Measured by GDP, nearly 90pc of the world is experiencing slower growth,” she emphasised and attributed the US-China trade war, Brexit and geopolitical tensions as major factors causing hazards on shared roadways and forcing the slowdown.

The IMF presented five priorities as the Global Policy Agenda to address challenges

World Bank chief David Lipton explained that a good portion of the increased growth in 2020 was based on the presumption that a number of very troubled economies that fell sharply this year, Iran, Venezuela, Argentina, Turkey, will not decline again. But it is unclear whether this presumption will really happen, making the forecast precarious.

The IMF chief said that her staff had calculated the impact of the already imposed or announced tariff measures by the US and China at 0.8pc by 2020. This is an equivalent of $700 billion shaved off the global economy. However, the positive sign was that the two big powers were talking to each other and in case of an agreement, the impact would start shrinking and reduce the loss by 0.2pc.

Mr Lipton argued that in a world where China is such a large player in the global economy, it is important that their reforms continue as the country will benefit a lot from them. And the US and China have a big role to play in leading the global economy at a time where everyone has much to gain from the strengthening of trade relations that could make international trade once again an engine of growth for the global economy.

Ms Georgieva said the Fund has also examined the Brexit impact on Europe. “Exiting without a deal could cost the United Kingdom economy up to 5pc loss in GDP, and it would cost the European Union up to half a percentage point loss of GDP”. An exit with a deal still could result in a 2pc loss for the UK economy but with the caveat that a lot of that impact has already been absorbed because the anticipation of the UK leaving the EU has been built over a three-year period.

Gita Gopinath, the Fund’s chief economist and director of the research department, said the downgraded growth forecast for 2019 to 3pc was the lowest rate since the global financial crisis. Growth continued to be weakened by rising trade barriers and growing geopolitical tensions, she said, adding that a modest recovery projected at 3.4pc in 2020 was also a 0.2pc downward revision from April projections.

She, however, warned that unlike the synchronised slowdown, this recovery was not broad-based and remained precarious. The weakness in growth, she explained, was driven by a sharp deterioration in manufacturing and global trade, with higher tariffs and prolonged trade policy uncertainty damaging investment and demand for capital goods.

In addition, the automobile industry was contracting, owing also to a variety of factors, such as disruptions from new emission standards in the Euro area and China that have had durable effects. Overall, trade volume growth in the first half of 2019 has fallen to 1pc, the weakest level since 2012. If growth were to deteriorate more severely, an internationally coordinated fiscal response, tailored to country-specific circumstances, may be required.

Another major theme of the Bretton Woods meetings was climate change and participants generally agreed that the challenge was so serious that central banks needed to step in with through their monetary policy roles.

Vitor Gaspar, the IMF director for fiscal affairs, while launching one of the flagship publications “Fiscal Monitor”, emphasised that existing pledges under the Paris Agreement were not enough because it will limit global warming to three degrees Celsius — well above the safe level.

“To limit global warming to two degrees Celsius or less, the level deemed safe by scientists, fiscal policy must be mobilised, and governments and finance ministers need to take further substantial action,” he said advocating the introduction of a carbon tax and increasing it to $75 per tonne by 2030.

He opined that if the carbon tax of $75 per tonne were implemented globally, China and India would account for almost 70pc of CO2 reductions among G20 economies, compared with a noaction scenario. This reflected the dominant role of coal in the production of energy in China and India.

But this will lead to a higher cut in consumer demand. For retail electricity, for example, price increases would vary from 2pc in France to 89pc in South Africa. The average increase would be 45pc. The differences largely reflect the role of coal in generating energy in each country.

“The goal is to reshape the tax system and fiscal policy more generally to discourage emissions. It is crucial that the additional revenues from carbon taxation are used appropriately to reduce burdens and make the reform more politically acceptable”.

Going forward, the IMF presented five priorities as the Global Policy Agenda to address challenges. The first priority is to undo the harm inflicted on trade and find a lasting solution that will help build a stronger trading system.

The second priority is to use monetary policy wisely. To that end, all central banks need to maintain their independence and communicate their plans clearly.

The third is to enable fiscal policy to play a more central role and the countries with room in their budgets should deploy — or get ready to deploy — fiscal firepower.

Fourth is to consider structural reform seriously to improve productivity gains for stronger, more inclusive and more resilient growth over the medium and long-term.

Fifth priority entailed promoting stronger international cooperation well beyond trade — from financial regulatory reform, to addressing climate change, to safely adapting to fintech, to fighting money laundering.

Published in Dawn, The Business and Finance Weekly, October 21st, 2019