The IMF warned on Tuesday the disruptions in international economic ties, resulting from the rising dollar’s FX rate, the possibility of a Brexit, and the US’ aspirations to renegotiate its trade deals, might infer severe consequences for global growth. Meanwhile, income inequality, impairing personal consumption throughout the world, has been prompting the Fund to downgrade its global growth estimates for fourth time in the past twelve months.
In 2016, the IMF is expecting the world economy to add 3.2% compared to the Fund’s previous estimates released in January at 3.4%. Earlier, the IMF had downgraded its 2016 global growth estimates in October and July 2015.
“Global growth continues, but at an increasingly disappointing pace that leaves the world economy more exposed to negative risks,” Maurice Obstfeld, Chief Economist for the IMF, said at the opening of the semiannual IMF and World Bank meetings on Tuesday. “Growth has been too slow for too long.”
The six-day IMF and World Bank meetings are underway, and the gloomy IMF outlook was echoed by many policymakers during the initial discussions. Germany’s Finance Minister Wolfgang Schaeuble admitted the ultra-loose monetary policies of the European Central Bank (ECB) are inflicting great damage to the German holders of monetary assets like savings accounts or liquidity reserves, in particular, pensioners and financial institutions.
“In the euro area, market pressures also highlighted long-standing legacy issues, indicating that a more complete solution to European banks’ problems cannot be further postponed,” the IMF noted.
However, the ECB has no other option but to keep negative interest rates for at least a while, as low oil and commodity prices are undermining inflation and overall growth outlook for the entire Eurozone, while weakening international trade is hitting European capital-intensive manufacturers as overseas markets are failing to provide sustainable demand for hi-tech goods.
US Secretary of the Treasury Jack Lew called on the G20 member states to take decisive steps bolstering the demand side of their respective economies, but warned of excessive currency devaluations in the struggle for competitiveness in the weakening international trade. Economies should "avoid persistent exchange rate misalignments and refrain from targeting exchange rates for competitive purposes," Lew noted.
Even though mainland China’s slowdown has been the main global economic concern during the past several years, impairing international commodity prices, the broader economic outlook on the world’s leading economies has darkened this year as well. Commodity glut resulted in factory-gate inflation in emerging markets, a trend currently spreading to advanced economies, undermining the very foundations of efficient economic expansion. The US is forecasted to grow by 2.4% in 2016, according to the IMF, a downgrade from 2.6% as estimated in January. A stronger dollar undermining corporate America’s international competitiveness is the main challenge to US growth.
Canada, the Eurozone, the UK, and Japan are all under pressure. The Canadian economy is experiencing a massive expansion of domestic borrowing, driving the economy, resulting in the increased risks of the domino-effect financial meltdown similar to that in the US in 2007-2008. The Eurozone and Japan are sagging deeper into disinflation and faltering consumption, while for the UK, an outlook on Brexit in the main challenge, potentially undermining investors’ trust in the nation’s financial institutions as asset safe havens.
“Disruptions to global asset markets could increase the risks of tipping into a more serious and prolonged slowdown marked by financial and economic stagnation,” the IMF said.
Currently, the IMF outlined, most of the world’s economies are facing disinvestment in the real sector. However, the Fund does not mention the massive expansion of financial sectors in Asia-Pacific, Europe and North America during the past year. Enormous influx of capital into stocks and bonds, particularly, in New York, Frankfurt and London, resulted in the financial sector being dramatically overvalued compared to the negligible gains in the respective real economies.
The IMF urged international policymakers to work out prudent policy adjustment mechanisms, based on the current economic expansion while it still lasts. Providing greater financial stability, while improving growth and inflation should be key directions of the monetary and fiscal policies effort, according to the IMF.
Yet, nonconventional policies of monetary stimuli, first implemented in 2008, have largely worn out by now, as evidenced by the ultra-stimuli in Japan and the Eurozone hardly providing any boost to their respective non-financial sectors. Policies of fiscal stimulus, such as increased governmental spending, have proven to only undermine the profitability and competitiveness of the private sector, as evidenced by the recent dynamics and structure of the US economic growth.
Therefore, as direct regulations have become inefficient, structural reforms aimed at boosting consumption and private sector incentives, are becoming a self-evident necessity ensuring the revival in non-financial sectors all across the world.