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Finding a way out of the great global growth slump

Finding a way out of the great global growth slump
IMF managing director Kristalina Georgieva. (Photo: EPA-EFE / Michael Reynolds)

The IMF this week confirmed that the global outlook is as bleak as we all expected. If global authorities are unable to play nicely and tackle the global growth problem together, central bankers may be forced to go down unorthodox paths, like direct debt monetisation, aka helicopter money.

The world has got itself into what threatens to be an intractable global growth quagmire and, with all the geopolitical and economic headwinds currently at play, getting out of it could see policymakers forced to resort to extraordinary measures. Failure to take action could result in a crisis that would make 2008 look like child’s play.

The headwinds policymakers are facing are mounting and urgently need to be resolved as the world experiences its lowest growth rate in a decade and flounders for ways to reverse decelerating global growth.

In the immediate term, the trade war heads up the list as the costliest economic development of the past few years. Global growth figures released this week by the IMF showed just how much trade tensions have cost the world.

World growth forecasts released on Tuesday 15 October, along with the latest World Economic Outlook (WEO) showed growth for 2019 revised downwards to 3% from its previous 3.2% forecast. More notable is the fact that in its January 2018 WEO, ironically titled “Brighter Prospects, Optimistic Markets, Challenges Ahead”, the IMF predicted that 2019 growth would come in at 3.9%, which shows the impact trade tensions have had since trade talks began between the US and China in May last year.

In her curtain-raiser speech last week, IMF managing director Kristalina Georgieva shared the organisation’s estimates of the direct and secondary costs of the three rounds of trade tariffs announced this year.

The IMF estimates the costs to the world economy could be some $500-billion this year and as high as $700-billion in 2020. Georgieva notes that in 2020 the costs will amount to 0.8% of global GDP which, to put this in perspective, equates to the size of the Swiss economy.

Secondary costs are the most worrying and far higher than the direct costs of trade tariffs. These include the loss of confidence as a result of the tariffs, market reactions to the trade tensions and lost productivity as a result of the manufacturing industry and supply chain responses to the implementation of tariffs.

Initial indications were that last week’s trade talks in Washington between the US and China had resulted in a partial – or mini – deal that would take this month’s tariff increases off the table and potentially the year-end’s planned tariffs too. But, given the many false starts that have been experienced so far – and rumblings this week regarding China requesting further talks before signing on the dotted line – nobody is holding out too much hope that these talks will signal the beginning of the end of the trade war.

Brexit also poses an unquantifiable risk to the global economy, given its uncertain outcome and Britain’s role as a leading developed nation whose economic future is yet to be determined.

Other major headwinds confronting the global economy are the escalating geopolitical risks in Syria and the Middle East, with Saudi Arabia and Iran swapping accusations regarding the damage to oil facilities and tankers.

Getting out of the world’s current low-growth, low-inflation trap will require policymakers and politicians to implement extraordinary measures – more extraordinary than the almost $10-trillion spent on global monetary stimulation in the wake of the 2008 crisis. So far, this money spent has failed to buoy the world economy and critics say further easing, along the lines of the bond-buying programmes the US Fed and European Central Bank have reverted to, will be counterproductive and have unintended consequences.

Central bankers in the US and Europe have repeatedly asserted that monetary policy alone cannot be relied upon to stall and then turn around this slowing growth trajectory. They have called on governments to step up to the plate, but the reality is that most governments’ fiscal capacity is limited and certainly their war chests are nowhere near the amounts needed to kick-start the global economy.

The IMF believes only globally coordinated policy responses will fix the fractures in the economy. Georgieva says we should improve the current system, not abandon it. A tall ask, given that trade tit-for-tats have already sent the world down a path that ultimately leads to further global fragmentation.

However, Georgieva makes the important point that, beyond economic integration, international co-operation is needed to manage the following four big-ticket global issues even though the will to co-operate is waning:

  • Safely adapting to fintech and the cyber risks that come with it;
  • Fully implementing the financial reform agenda;
  • Fighting money laundering and the financing of terrorism; and
  • Combating climate change.

Failure to rally behind a concerted, consolidated approach to resolving the economic growth dilemma confronting the world could see policymakers turning to controversial policies, such as helicopter money, which would see monetary policy authorities put money directly into the pockets of governments and the man-on-the-street in an attempt to boost economic activity.

Also known as monetary finance or direct debt monetisation, arguments in favour of helicopter money are, according to Russell Jones and John Llewellyn of Llewellyn Consulting, “that it can overcome any predisposition for deleveraging in either the private or the public sector. And, because it makes no demand on (existing) private sector savings, it is likely, dollar for dollar, to prove more expansionary than QE or orthodox fiscal expansion.”

On the flip side, arguments against such an unorthodox policy route are that it could introduce moral hazard, giving government blank cheques to draw on, as well as increase the risk of inflation.

Jones and Llewellyn conclude: “Generally, it is a bad idea. However, there can be circumstances, perhaps not too dissimilar to the current environment, where it is an appropriate policy, if not the only viable policy option.”

Few would argue that, in the long term, it will be innovation and productivity, not desperate and insular policy measures, that will secure a healthy and sustainable global economic future. But in the meantime, as Georgieva warns, the world faces a crisis to which no one will be immune and “everybody has a responsibility to react”. BM

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