The revised global economic outlook of the International Monetary Fund is sobering. It is rare for an organization to drastically revise its economic growth forecasts for just one quarter of a calendar year. But in this case, it did so for 86% of its 190 Member States, leading to a drop of almost one percentage point in global growth in 2022 – from 4.4% to 3.6%. In addition, this forecast is accompanied by a significant increase in projected inflation, and all this bad news is wrapped in a shell of deeper uncertainty. There is a downward shift in the balance of risks and inequality is expected to worsen within and between countries.
The revision of the WEO attracts a lot of media attention. The focus, of course, is on the relatively large size of the revisions for the current year, most of which are related to the disastrous economic consequences of Russia’s invasion of Ukraine. The war disrupted supplies of corn, gas, metals, oil and wheat, and raised the price of critical raw materials such as fertilizers (which are produced from natural gas). These events have sparked warnings of an impending global food crisis and a serious increase in world hunger. Given the scale of the disturbance, I will not be surprised if the IMF issues a further revision down its growth forecasts – especially for Europe – later this year.
But as important as these effects are for 2022, especially in terms of the impact on vulnerable populations and fragile states, we must also pay attention to the IMF’s 2023 outlook. The forecast for next year points to a medium-term problem which is no less important: the lost power of global growth models. The IMF does not expect its significant downward revision in global economic growth in 2022 to be offset in 2023. Instead, it lowered its forecast for next year from 3.8% to 3.6%, with these revisions referring to advanced and emerging economies.
The bottom line is that the world’s economic engines are spreading. This problem is particularly worrying in such a changing operating environment, as it means that the prevailing growth patterns do not meet the task of driving economies through unexpected negative shocks. To make matters worse, the same models also failed to maintain a decent level of inclusive growth during periods of less stress.
Three major secular events are to blame for the cool outlook: the changing nature of globalization; long-term reliance on artificial growth stimulants; and the long-term failure to invest in sources of sustainable growth.
The trade war between the United States and China has had negative consequences for the entire world economy. Photo: Future Publishing / Getty Images
Economic and financial globalization is evolving in ways that make it difficult for national economies to use international trade and foreign direct investment for domestic growth. While the pandemic raised questions about the proliferation and potential vulnerabilities of cross-border supply chains just in time, it is worth recalling that trade and investment restrictions increased long before the advent of Covid-19. The trade war between the United States and China is characterized by the return of high tariffs and other protectionist measures that generate long-term effects on the world economy.
While governments must use their firepower to protect vulnerable people, some are already facing alarming levels of debt
Moreover, these developments have come at a time when many countries are facing tighter political restrictions. The return to conventional and unconventional monetary policy incentives is now hampered by high and sustained inflation. As the IMF notes, this new environment confronts central banks with very delicate and problematic political compromises and exposes the real economy to the potential vagaries of financial market instability.
Although the scope of fiscal action is less limited than that of monetary measures, it is not well distributed among the countries. While governments must use the firepower they have to protect the most vulnerable segments of their populations, some are already facing alarming levels of debt.
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These developments coincide with a period of low productivity growth in many countries, which is a function of past and persistent failures to invest in engines of real growth, including physical infrastructure and human capital.
The IMF report offers an important reminder to politicians that they need to focus much more on generating innovation, improving productivity and strengthening other drivers of stable, inclusive economic growth. If you do not, the risk of medium-term stagnation of growth will become uncomfortably high. In a world that is already subject to significant climate, economic, financial, institutional, political and social challenges, this is not a scenario we can afford.
Mohamed El-Erian, president of Queens’ College at the University of Cambridge, is a professor at the Wharton School at the University of Pennsylvania
© Project Syndicate
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