It’s been six years since the global financial crisis, but that calamity fails to recede from the rear-view mirror.
As Finance ministers and central bankers from around the world gather in Washington for the annual meetings of the International Monetary Fund and the World Bank, the stubborn legacy of the 2008-09 crisis will loom over their discussions. The oft-forecast acceleration of global growth has once again failed to materialize, thanks to a moribund Europe and woes in a number of emerging market economies, while new geopolitical risks — from Ukraine to the Middle East to the Ebola outbreak in West Africa — threaten fresh trouble.
“The global economy is at an inflection point,” Christine Lagarde, the IMF’s managing director, said in an agenda-setting speech at Georgetown University last week. “It can muddle along with sub-par growth—a ‘new mediocre’ — or it can aim for a better path where bold policies would accelerate growth, increase employment, and achieve a new momentum.”
Unfortunately, the odds strongly favor muddle. Government remains paralyzed in the U.S. ahead of next month’s mid-term elections, and President Obama has his hands full with the crises of ISIS, Ebola and his own plummeting poll numbers. Europe continues to flirt with deflation and a triple-dip recession, and the only good news — if that’s what you can call it — is that Germany’s steep summer downturn might persuade Berlin to reconsider its attachment to austerity policies.
Emerging markets have gone from being a growth motor in the immediate aftermath of the financial crisis to a grab bag of strengths and weaknesses. China appears to be struggling to maintain growth above 7 percent; Russia’s economy is flat-lining and hemorrhaging capital thanks to Vladimir Putin’s aggressive stance in Ukraine and at home; Brazil is stagnating and many investors are hoping that center-right candidate Aécio Neves can defeat President Dilma Rousseff in the October 26 run-off election and turn the economy around. India shows signs of recovery but the enthusiasm that greeted Narendra Modi’s election in May has yet to be transformed into concrete action.
The net result is a sober economic outlook. The IMF earlier this week downgraded its forecast for global growth this year to 3.3 percent, down 0.1 point from July and 0.4 point from April. It projects only a modest upturn in 2015, to 3.8 percent, down from 4.0 percent previously. Although the Fund sees the U.S. recovery staying on track, it slashed its forecast for 2014 growth in the euro area by 0.4 point from July, to a tepid 0.8 percent. Notably, Germany suffered the sharpest cut in forecast growth, down half a point to 1.4 percent.
In emerging markets, the Fund sees growth in China slowing from 7.4 percent in 2014 to 7.1 percent in 2015; Russia growing by just 0.2 percent and 0.5 percent, respectively; Brazil going from 0.3 percent to 1.4 percent, and India picking up from 5.6 percent to 6.4 percent.
Even more sobering than any individual forecast, the Fund gave fresh backing to the idea of a structural downshift in the global economy. With many economies hobbled by debt and interest rates at or near record low levels, the potential long-term growth rate of the global economy has slowed to just under 3 percent currently from nearly 4.5 percent before the global financial crisis.
The Fund is urging governments to step up investment in infrastructure, which it contends will boost growth in the short term and elevate growth potential in the long run. “In a time of economic shortfall and inadequate public investment, there is for once a free lunch — a way for governments to strengthen both the economy and their own financial positions,” former U.S. Treasury secretary Larry Summers wrote in a column in the Financial Times earlier this week, supporting the infrastructure idea.
The World Bank will launch a new Global Infrastructure Facility on Thursday that seeks to attract private sector investment to the sector by streamlining preparation on priority projects and pairing private investors with multilateral lenders. With the facility, a big infrastructure push “can be piloted quickly and does not require new resources,” Jim Kim, the bank’s president, said at a news conference on Thursday. It has taken the bank more than a year to get the facility off the ground, however, and it’s unclear how much of an impact it will have.
“On whether we’ll be able to ... increase demand enough to get to potential output, I think we don’t know yet,” IMF chief economist Olivier Blanchard said at a news conference. “It may be difficult.”
Much of the attention at the meetings will focus on Europe. Markets have been disappointed by the European Central Bank’s latest program of asset purchases, deeming it too little to stimulate the 18-nation euro area’s economy. Data released earlier Thursday showing a 5.8 percent drop in German exports in August added to the gloom.
“There is a risk that the recovery in the euro area could stall, that demand could weaken further, and that low inflation could turn into deflation,” Blanchard said earlier this week in releasing the Fund’s economic forecast. “Should such a scenario play out, it would be the major issue confronting the world economy.”
The weakness in Europe underscores the central dilemma facing policymakers in advanced countries. Zero policy rates maintained by central banks to help their economies recover from the crisis are pushing investors to take greater risks in a search for yield, raising the danger of instability in stock and credit markets, something the Fund warned about earlier this week with in its Global Financial Stability Report. Yet it’s not clear that economies can withstand an exit from unconventional monetary policies. The minutes of the latest Federal Open Market Committee meeting, released yesterday, indicated that Fed officials were worried about the dollar’s strength and weakness in Europe, causing many market participants to bet that the Fed would be slow to begin hiking rates next year. The yield on the U.S. Treasury’s benchmark 10-year note has fallen more than a quarter point since mid-September, to 2.31 percent on Thursday.
“The U.S. economy is doing better but it’s still subpar to what the run rate would have been in the past,” says Krishna Memani, chief investment officer at OppenheimerFunds in New York. He worries that Europe’s weakness will weigh on the U.S. economy, and delay a Fed exit from zero rates. “The risk we have is that the global context can unwind the recovery we have in the U.S. if the Fed isn’t careful,” he says.
The Ebola epidemic also casts a large shadow over the meeting. The World Bank on Wednesday projected that unless the outbreak is contained quickly, it could cost West African economies $36.2 billion by the end of 2015. “That would be catastrophic for the people of the West Africa region,” said Kim, a doctor who has pioneered efforts to combat infectious diseases in developing countries.
Kim urged governments to take urgent action to contain the epidemic, warning that “the price tag goes up every day that we delay.” He drew encouragement from an agreement on Thursday by the presidents of Guinea, Liberia and Sierra Leone to evacuate any international medical staff that comes down with Ebola. Such a commitment is essential to getting outside governments to send staff into the countries.
See also our video series, “The Global Outlook at the 2014 IMF Meeting,” with economists Nouriel Roubini and David Levy and J.P. Morgan’s Michael Hood.
