By a lot of measures, these are very good times for the global economy. Nearly every major region of the planet is enjoying solid growth and prosperity simultaneously for the first time in a decade. Yet the world's top economic policymakers, who are ...and more »
By a lot of measures, these are very good times for the global economy. Nearly every major region of the planet is enjoying solid growth and prosperity simultaneously for the first time in a decade.
Yet the world’s top economic policymakers, who are gathered in Washington this week, are sounding awfully glum.
“The present good times will not last for long,” said Maurice Obstfeld, chief economist of the International Monetary Fund, as he released the fund’s latest projections, which foresee a solid 3.9 percent expansion of the global economy in 2018.
Or as his boss, the I.M.F. managing director Christine Lagarde, put it, “The current global picture is bright, but we can see darker clouds looming.”
The pessimism among policymakers — who are attending spring meetings of the I.M.F. and World Bank in Washington this week — contrasts with financial markets. Despite a bumpy couple of months, stocks and most other financial assets are still priced at levels that suggest growth will continue apace for some time to come.
“Economists are paid to worry,” said Nathan Sheets, chief economist at PGIM Fixed Income and a former official at the United States Treasury and the Federal Reserve. “We’re paid to find problems and challenges. I think the markets, on the other hand, are pretty good at living in the moment.”
What are these policymakers so worried about? Is this just a bunch of economists living up to their field’s reputation as the dismal science — or worse, letting their own policy preferences shape their forecasts? Or is the world economy, for all its apparent prosperity, actually in peril?
Let’s look at the interrelated threats the economists see.
Trade War Worries
President Trump tweeted last month that trade wars are “good, and easy to win,” but it is safe to say that leading economic policymakers do not agree. They instead see the risk of ruin in the administration’s tariff threats — a cycle of retaliation that could disrupt companies’ supply chains and cause global commerce to falter.
Steel coils for car production in Emden, Germany, last month. A steep tariff on steel imports is among the threats from President Trump that have unnerved economists.CreditDavid Hecker/Epa-Efe, via Rex, via Shutterstock.Ms. Lagarde argued in a speech last week that the global trading system has had tremendous benefits in terms of reducing poverty and creating higher-wage jobs. “But that system of rules and shared responsibility is now in danger of being torn apart,” she said.
For now, this remains more a theoretical risk than a cause of major disruption to economic expansion.
The Trump administration has threatened a withdrawal from the North American Free Trade Agreement, a steep tariff on steel and aluminum imports, and the intention to tax $50 billion (or maybe $150 billion) of Chinese imports. But it has then backed away, entering Nafta renegotiation, granting exceptions to the steel and aluminum tariffs to many countries, and delaying tariffs on Chinese imports.
Essentially the Trump administration pattern so far has been to pair belligerent language with comparatively restrained action. Trading partners have worked to find resolutions rather than let a full-scale trade war erupt. There is a tentative deal to renegotiate the United States’ trade agreement with South Korea, for example, and Nafta negotiations are continuing.
A World of Financial Imbalances
Global policymakers are worried about more than conflict over trade. They also see an emerging series of financial imbalances and risks that could cause, or worsen, the next downturn.
For years, for example, some countries — Germany, Japan and China prominent among them — have persistently run current account surpluses, meaning they export more than they import and essentially export capital to the rest of the world. Others, including the United States and Britain, have run persistent current account deficits.
Over time, these patterns can create vulnerability to financial shocks; they helped fuel both the 2008 global financial crisis and the 2010 eurozone crisis. And the I.M.F. projects that they will worsen in the next couple of years, despite steady economic growth.
For example, Germany’s current account surplus is set to rise from 8 percent of G.D.P. in 2017 to 8.2 percent in 2018 and 2019, according to the World Economic Outlook. The United States’ current account deficit is forecast to rise to 3 percent of G.D.P. from 2.4 percent.
The tools to prevent those shifts are within each country’s purview. Germany could spend more on domestic investment, and the United States could reduce its budget deficit, which might start to reduce those imbalances. Neither has much evident political appetite to do so.
At the same time, years of efforts by central banks to fuel economic recovery have left interest rates low worldwide and prices in financial markets relatively high.
The I.M.F.’s Global Financial Stability Report, released Wednesday, warns that “easy financial conditions risk fueling financial vulnerabilities that may put medium-term growth at risk.”
So, for example, if inflation starts to perk up and the world’s central banks raise rates to try to prevent it from taking root, there could be a cascading series of disruptions to financial markets that have become accustomed to cheap money.
High Debt, Low Rates and the Next Recession
Another worry: While the major economies look relatively strong right now, they may also prove brittle when the next shock arises.
Rather than using this period of stability and prosperity to pay down debts, some major economies are moving in the other direction — including with rising public debt levels in the United States and high private debt levels in China.
“In the United States, the fiscal impulse is important, but that is something that at some point doesn’t give you any more mileage in terms of growth,” said Agustín Carstens, general manager of the Bank for International Settlements and former governor of the Bank of Mexico, in an interview Wednesday. “And China need to continue improving the quality of growth from the point of view of the dependency on credit.”
That dependency on debt means that whenever the next economic downturn arrives, governments may have less leeway to deal with it by opening the floodgates of public spending.
And with interest rates still low across the entire advanced world, one of the normal tools for dealing with a recession still has limited power. For example, the Federal Reserve entered the last downturn with its short-term interest rate at 5.25 percent, before cutting to nearly zero by December 2008. Currently, that target rate is between 1.5 percent and 1.75 percent.
The European Central Bank has even less room to maneuver, with its policy rates still near zero.
In effect, a decade after the financial crisis, if another recession were to arise, both central banks and fiscal authorities may find themselves short of ammunition to fight it.
People Who Tend to Fret
There is surely an anthropological dimension to the kind of worrying that is emerging from conference halls in Washington this week.
The people who end up as central bankers or finance ministers or I.M.F. officials tend to worry a lot about what could go wrong. They also tend to place greater value than most on the kinds of international institutions that underpin the global trade system, of which the Trump administration is deeply skeptical.
But there’s also no doubt that the largely good economic news of the moment comes with some warnings worth listening to. Even when enjoying sunny weather, it never hurts to know what you’ll do if it starts to rain.
Neil Irwin is a senior economics correspondent for The Upshot. He previously wrote for The Washington Post and is the author of “The Alchemists: Three Central Bankers and a World on Fire.” @Neil_Irwin•Facebook
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