Political deviations threaten to derail a world economy that is brightening
Optimism tempered by fear. That is the mood at the annual meetings of the IMF and World Bank in Washington DC. The capital of the US has also been the heart of the liberal international economic system for more than 70 years. Yet the Trump administration sees this great success as a plot against the US.
In the past decade, three successive shocks have battered the world economy: the financial crisis of 2007-09; the eurozone crisis of 2010-13; and the commodity price collapse of 2014-15. But all is now calm. The IMF’s World Economic Outlook expects that only six of the 192 economies it covers will fail to grow in 2018.
Among important highincome economies, the outlook is better now than in April for all but the US and Brexit-hit UK.
True, reasons for worry remain. That might even be a good thing: euphoria has so often proved a harbinger of crises. Financial risks are evident in many high-income countries, as well as in China. Debt levels are high by historical standards and, in some cases, rising. Assets are generously priced by historical standards: the valuation of US stocks is not that far from the historic peaks reached in 1929 and 2000.
As important, economically and politically, growth in highincome countries remains structurally weak: productivity growth is limping and labour markets have been generating slow growth in wages and disposable incomes. Moreover, while high-income economies have been healing from the Great Recession, its effects remain. The aggregate real GDP of the high-income countries is about a sixth smaller than it would have been if precrisis rates of growth had continued.
Yet the recession’s political effects may be far more important. The crisis and its lingering aftermath have damaged confidence in elites. This shock came on top of a host of social and economic changes.
Taken together, these upheavals have, as so often before, opened the way to demagogues, promising simple solutions to complex problems. This happened in the Brexit campaign in the UK, where a small majority was induced to choose a journey to an unknown destination. This has happened in Catalonia, launched on a potentially devastating journey to independence. It has happened in the US, where the implications of Donald Trump’s election remain as obscure as they were on the day of his inauguration.
Inevitably, the transformation of US policy is far and away the deepest worry. This might still amount to little more than sound and fury signifying nothing. But it is also far too early to be confident of that. The administration seems set on tax cuts at a time of near full employment. It suggests that this will create a huge upsurge in growth. That is not inconceivable, but it is hugely unlikely. More likely are rising inflation, a rise in rates, a higher dollar and a huge surge in the current account deficit.
Meanwhile, the administration is also set on the opposite objective of reducing the external deficit through a series of negotiations, starting with the North American Free Trade Agreement. The aim of fixing an overall current account deficit through bilateral trade negotiations is not only intellectually incoherent, but clashes directly with its fiscal policies. It could lead to the cumulative unraveling of the global trading system.
As important might be the choice of the next chair of the Federal Reserve. We have learnt the enormous effect of that choice in shaping not just the US, but the world, economies.
Beyond this is the fear of global conflict. Of great significance could be the determination of Trump to decertify Iran’s compliance with the deal on nuclear arms, without supporting evidence. This would demonstrate that a deal with the US means nothing.
Quite as dangerous would be an attack on North Korea, which would devastate an important US ally, South Korea. That would demonstrate to US’s other allies that they are also dispensable.
Maybe, as economies improve, the anger that led to the populist upsurge might dissolve. The question is whether such a political recovery might prove too late. The demagogic tide might amount to little in the end. But these risks shadow the talks in Washington. Markets happily ignore it. Markets might be wrong.
AMONG HIGHINCOME ECONOMIES, THE OUTLOOK IS BETTER NOW THAN IN APRIL FOR ALL BUT THE US AND UK