Policymakers from some 180 countries wrapped up the spring meeting of the International Monetary Fund and World Bank in Washington on Sunday with a warning: Take steps now, while the global economy is still strengthening, to head off escalating risks of instability looming just over the horizon.
The message was reminiscent of the “yes, but” theme that dominated the same group’s annual meeting in October 2017. The consensus over the weekend was that the pace of growth had picked up in the intervening months, but so had the scale of the threats to it.
In the run-up to the meeting, the IMF’s revisions to its World Economic Outlook were dominated by predictions of faster growth than had been forecast six months ago. The accompanying message, crystallized in the communique of the International Monetary and Financial Committee issued on Saturday, welcomed stronger and more broad-based growth around the world. But it also warned about intensifying risks beyond the next several quarters and urged an expeditious response while positive economic conditions give policymakers latitude to act.
“While the sun is shining, we are seeing more clouds accumulating on the horizon,” said IMF Managing Director Christine Lagarde in her speech to delegates. She urged countries to “fix the roof” with sunshine prevailing.
The Power of Compounding
In today’s global economy, sunlight can enhance possibilities of stimulating virtuous economic, financial, political and social cycles, both within countries and across borders.
Given the extent of economic and financial interdependencies, the benefits of many countries growing at the same time are often larger than simple addition would suggest. That’s an argument in favor of simultaneous movement toward enacting more pro-growth policies, and on reducing what has been a decade’s worth of excessive reliance on unconventional monetary policy, including enormous central bank bond-buying programs.
Taken together, these measures would improve the ability of countries to service the large debts accumulated by both private and public sectors in recent years, something that the IMF felt the need to sound an alarm about. And by opening the door to an orderly validation of elevated asset prices, this would reduce the risk of financial instability down the road.
The potential payoff is not limited to economics, finance and policy. Higher and more inclusive growth could lower political anger and trade tensions and counteract social pressures associated with the widening of inequality of income, wealth and opportunity.
Three T's and Three D’s
There are two main reasons why taking these logical steps won’t necessarily happen, either easily or automatically.
First, the global economy faces structural uncertainties and headwinds. As I argued last week, the world economy is already in the midst of three major transitions – in equity market volatility, economic policy and global growth. The environment was captured well over the weekend by David Lipton, the IMF’s first deputy managing director, who spoke of “Three T’s” representing notably large and unpredictable economic forces. (Lipton’s Three T’s shouldn’t be confused with the ones cited almost 10 years ago by the former White House economic adviser Lawrence Summers when he coined the formula “targeted, timely and temporary” to help shape the policy thinking coming out of the 2008 global financial crisis.)
Lipton’s Three T’s are technology, trade and trust. The idea is that the uncertain direction of these powerful forces could change not just what households, companies and governments do, but how they do it. For example:
- The disruptive power of accelerating technological innovation comes from its ability to enhance both supply and demand at the same time, particularly by lowering and eliminating barriers to entry for an expanding set of activities and interactions.
- Recent trade tensions are undermining global interactions that had already been disturbed by dissatisfaction with inequality fueled by unfettered economic and financial globalization.
- A pronounced trust deficit – in the establishment, traditional institutions and expert opinion – encourages economic actors to disengage, self-insure and have less faith in measures to improve the common good over the long term.
Debt, demography and devaluation are adding to the fragmentation amplified by the Three T’s.
An IMF analysis showed that total indebtedness is now higher than before the global financial crisis, and that the potential vulnerability of low-income countries is no longer mainly from excessive liabilities to traditional western creditors.
Accordingly, the two largest economies in the world came in for criticism from the IMF. China was cited for insufficient transparency in its dealings with low-income countries and the U.S. for the looming deficits attributable to its recent tax cuts and spending increases. “Demographic headwinds” in the form of aging populations were seen to compound downside risks for medium-term productivity and employment, as were actual and perceived competitive devaluations.
Returning to issues that policymakers have discussed many times before, the IMF delegates were again in broad agreement on what is needed. Quickly turning this into reality, however, is not something that the vast majority of participants felt confident about.
Concerns about implementation risks are compounded by the fact that history provides no guidance or insights on how the global economy and markets will navigate the upcoming transition in the central banking community – from policy normalization by a single systemically important central bank (the U.S. Federal Reserve) to a simultaneous process involving other systemically important institutions (particularly the Bank of Japan and the European Central Bank).
The Bottom Line
The IMF meeting produced neither a policy breakthrough nor a significantly better understanding of how and when the tug of war between current prosperity and future risks is likely to play out in the absence of better policies. This gives markets nothing new to grab onto, and will reinforce the “data dependency” mindset that has dominated key central banks. With that, we should expect continued market volatility, shifting asset-class correlations, and a continued high ratio of market noise to signal.
As to where it leaves my own probability assessment: Nothing came out of the spring meeting that alters my estimation that there’s a 65-35 likelihood of orderly transitions in economics, growth policy and markets.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE, the parent company of Pimco, where he served as CEO and co-CIO. He was chairman of the president's Global Development Council, CEO and president of Harvard Management Company, managing director at Salomon Smith Barney and deputy director of the IMF. His books include "The Only Game in Town" and "When Markets Collide."
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