Global Economy Still Slowing, Dangerously Vulnerable

Jomo Kwame Sundaram, Anis Chowdhury

(IPS)  – In an annual ritual early in the year, most major economic organizations have released forecasts for the global economy in 2020. Incredibly, almost as a reminder of where financial power resides in this day and age, the International Monetary Fund (IMF) released its forecasts at the World Economic Forum’s 50th annual meeting in Davos.

Although the IMF revised its global economic growth prognosis slightly downwards from its October 2019 forecast, it still offers the most optimistic prospect of 3.3% growth in 2020. The World Bank’s forecast of 2.5% – identical to the United Nations (UN) estimate – is the lowest, with the OECD’s at 2.9%.

The IMF justified its optimism by improved market sentiments following the Phase One US-China Trade Deal and diminished fears of a ‘no-deal Brexit’. Goldman Sachs describes these developments as ‘A Break in the Clouds’, forecasting global growth at 3.4% in 2020, while Morgan Stanley sees ‘Calmer Waters Ahead’, expecting 3.2% in 2020 and 3.5% in 2021.

Perils of ‘talking up’

It is not unusual for these organizations to be optimistic: after all, they do not want to be seen as naysayers, or prophets of doom, especially if their pronouncements are later denounced as self-fulfilling prophecies.

But ‘talking up the economy’ can have grave consequences, as with the 2008-2009 global financial crisis (GFC). Then, the IMF revised its forecast upward in July 2007, a month before the US ‘sub-prime’ mortgage crisis morphed into the worst global downturn since the Great Depression of the 1930s.

Meanwhile, the OECD was confident that any US ‘soft-landing’ would be offset by robust European economic performance. Such forecasts fostered a false and ultimately dangerous sense of invulnerability and complacence before the storm broke.

Policymakers ignored warnings by the United Nations since 2005 about fundamental weaknesses, including growing global imbalances and the debt-financed US housing bubble. As is now well known, the collapse of the US sub-prime mortgage market brought down world finance and, eventually, the global economy.

Hazards of forecasting

Thankfully, it is customary to include some cautionary notes with these annual forecasts, even when optimistic. For example, the IMF now warns of more downside risks, including geopolitical tensions, social unrest, trade tensions, and developing economies’ financial turmoil.

Both the UN and the IMF fear that the climate crisis can trigger financial stress, further slowing economic growth. To make matters worse, ignoring fundamental weaknesses and focusing excessively on ephemeral short-term trends can be dangerously misleading.

To be sure, forecasting is extremely hazardous, and sometimes compared unfavourably to astrology. Forecasters factor in plausible developments, but completely unpredictable ‘black swan’ events, such as the novel coronavirus pandemic, can upset even the best of forecasts.

Meanwhile, the World Bank warns of ballooning debt, both public and private. The UN and the World Bank also note that the sharp productivity growth slowdown since the GFC has reduced long-term growth and poverty reduction prospects; furthermore, high inequality will also delay such progress.

Both the UN and the IMF note that high and rising inequality also engenders greater social and political polarization, unrest and instability. Additionally, the UN also warns of deepening political polarization and growing scepticism about multilateralism as significant downside risks.

But none mention that the long-run effects of income inequality on both consumption and output can be quite large, delaying economic recovery by limiting aggregate demand and capacity utilization.

Policy failure

Such fundamental weaknesses owe much to policy failures. Unlike the New Deal following the Great Depression of the 1930s, all too many contemporary policymakers shy away from addressing core problems, such as financial excesses, rising household debt, exorbitant executive salaries vis-à-vis stagnant, if not declining real wages, that also contributed to the GFC.

Low (negative) interest rates, due to unconventional monetary policy, especially ‘quantitative easing’ (QE), have not promoted productive investments, and allowed less-productive firms to survive. Thus, QE  failed to boost productivity.

‘Easy money’ has been used for share buy-backs, mergers, acquisitions and inflated executive remuneration. Thus, as before the GFC, ‘fictitious capital’ is being systemically generated once again, contributing to asset price bubbles and endangering financial stability.

‘Easy money’ from developed economies has also flowed to developing countries in search of better returns, making them more vulnerable, besides raising their indebtedness yet again.

QE has also contributed to rising inequality. Meanwhile, major central banks have exhausted much of their means for lending at very low or even negative interest rates as they have very limited room to cut interest rates further.

No fiscal saviour

Besides reducing overall revenue collection and marginal income tax rates, the longstanding trend from direct to indirect taxation has shifted tax incidence from incomes to consumption, largely at the expense of the middle class.

Pursuing fiscal austerity under various guises, governments have slashed social and infrastructure spending in favour of public-private partnerships skewed in favour of influential corporate interests. Fiscal austerity also slowed economic recovery and technology adoption to the detriment of productivity growth.

Such fiscal reforms have not only exacerbated inequality, but also kept countries and households in debt bondage. And as governments have less fiscal space with rising debt, their ability to respond to crises – financial, climate or pandemic – is severely compromised.

Missed opportunity

Had national policymakers, led by the G20, embraced the UN recommendation for a Global Green New Deal to stimulate recovery, address the climate crisis and reverse growing inequality, the global economy could have been put on a more inclusive and sustainable path.

Such hopes remain even more elusive in an increasingly fractured world where multilateralism itself has been discredited and deliberately undermined by ethno-populism’s relegitimization of jingoism.