Fragile and delicate. The adjectives said it all. The mood at the spring meeting of the International Monetary Fund and the World Bank was sombre. The global economy has weakened in the past six months and the Fund thinks the risks are skewed to the downside.
The caution is justified, even though in some respects the outlook is less gloomy than the Fund suggests. For a start, there are some tentative signs that activity has bottomed out. The removal of the threat of higher interest rates from central banks has provided a boost to confidence. A substantial package of tax cuts and spending increases has arrested the growth deceleration in China. Two of the threats highlighted by the IMF in its world economic outlook – a full-blown trade war between China and the US, and a disruptive Brexit – look less serious than they did a month ago.
The IMF has some extremely smart economists but its short-term forecasting record is not impressive. It is possible things will turn out better than it expects.
So why the uncertain mood? There are three big reasons, worth looking at in ascending order of importance.
First, the finance ministers and central bank governors who gathered in Washington know that they lack policy space if things go wrong. There is a sense – quite justified – that measures taken to stave off recessionary pressures now will simply lead to even bigger problems later on. When that moment comes, interest rates will be low, central banks will be stuffed full of bonds acquired in the last round of quantitative easing and public debt will be high. The IMF gives short shrift to modern monetary theory – the idea that countries with their own currencies don’t have to worry about accumulating debt because they can print money to pay for public spending – but there are not that many options available. One option, suggested by Ken Rogoff of Harvard University in an IMF lecture, is negative interest rates, which he argued was made more feasible by the move towards cashless economies.
Another way out would be a coordinated global expansion of fiscal policy, mirroring the tax cuts and spending increases that the strategically important countries implemented in the depths of the financial crisis a decade ago. But this leads on to a second reason to be worried: international cooperation is much weaker than it was in 2008-09 and multilateralism is under threat.
This is primarily an American problem, which began under Barack Obama’s presidency and has become a lot worse under Donald Trump. The US is reluctant to show global leadership but is extremely hostile to the idea that another country – China – might fill the vacuum. As a result, the US approach is to be tactically aggressive – imposing tariffs and threatening to gum up the works at the World Trade Organisation – but strategically defensive. An isolationist US objects to Beijing’s Belt and Road Initiative but is offering nothing positive itself. The US and China might well piece together an agreement that will prevent a new round of tit-for-tat tariffs but the underlying tension will remain.
Finally, there’s climate change, which has moved up the agenda at the IMF and the World Bank. The best soundbite of the week came from the environmentalist Sir David Attenborough, when explaining the real and growing threat of a new era of extinction sweeping through the natural world: “It’s hard to exaggerate the peril we are in.”
Those responsible for running the global economy have belatedly woken up to the need to act on global warming and they now know all the right things to say: growth needs to be sustainable; growth needs to be decarbonised; growth needs to be compatible with meeting the commitments to reduce greenhouse gases made at the 2015 Paris conference.
Translating these words into action is another matter and the problems are many: the pushback from a fossil-fuel industry resistant to change; years of austerity that have, as witnessed by the yellow-vest protest in France, made it much harder for governments to raise taxes on petrol and diesel; the demands of the developing world for power; and political systems that provide incentives to kick the can down the road.
History provides a lesson of what ought to happen. Seventy five years ago this summer a gathering at a hotel in New Hampshire led to the creation of the IMF and the World Bank, and helped shape the global economy for decades to come. The Bretton Woods conference essentially took the principles of the New Deal – full employment, shared prosperity, government intervention – and internationalised them. The summits at Yalta and Potsdam established the framework for postwar international politics, Bretton Woods did the same for economics.
A new pamphlet by Kevin Gallagher of the Global Development Policy Center in Boston and Richard Kozul-Wright, director of the globalisation and development strategies division at the United Nations Conference on Trade and Development (Unctad), argues the case for a new multilateralism that would update the principles that underpinned the Bretton Woods settlement with the need for environmental sustainability.
The authors call for public investment in clean energy and transport systems; a green industrial policy; raising wages in line with productivity so that labour gets its fair share of the fruits of growth; regulating private financial flows; and ending predatory financial practices. To be sure, it’s the sort of manifesto the original architects of Bretton Woods would be coming up with if they were still around.
That’s the good news. The bad news is that the chances of the international community rallying round the idea of a global green new deal in the near future look pretty remote. And, as Attenborough noted, time is running out.
