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COMMENTARY

Mood set to be downbeat at IMF meetings

Washington

THE International Monetary Fund will soon issue its latest World Economic Outlook ahead of the mid-April meeting of leading finance ministers and central bank governors. The gathering will take place amid an increasingly uncertain and downbeat outlook.

Most 2019 forecasts for the US predict a slowing economy, but one growing above potential. Strong labour markets buoy disposable income and consumption. However, weaker US growth and purchasing managers index figures, tensions from President Donald Trump's trade wars and other external risks cloud the outlook. The Federal Reserve's continuing dovish swerves reinforce suspicions of a more significant softening, perceptions that will only be strengthened by the inverting yield curve.

China's economic outlook poses major questions. Deleveraging and trade tensions continue to weigh. Strong monetary and fiscal stimulus may be arresting a weakening in activity. But the authorities' stimulus is restrained relative to past efforts. Given the echo chamber of official pronouncements, all forecasts pencil in a growth estimate of more than 6 per cent for 2019. But the reality is that Chinese data is suspect. Anecdotal reports point to a much sharper downturn than soothing words from the authorities suggest. Further, a sustainable Chinese growth rate - let alone in a consumer driven economy, de-emphasising inefficient investment and intensive use of credit by state-owned enterprises - is significantly lower than 6 per cent.

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The euro area offers perhaps the most sombre outlook. In January, the IMF marked down its October 2018 WEO projection for 2019 EA growth to 1.6 per cent from 1.9 per cent, and Germany's to 1.3 per cent from 1.9 per cent. But in all likelihood, the Fund has farther to cut. The Organisation for Economic Co-operation and Development recently projected much weaker 2019 growth for euro area and Germany, at 1 per cent and 0.7 per cent, respectively. Between December 2018 and March of this year, the European Central Bank cut its euro area 2019 outlook to 1.1 per cent from 1.7 per cent, and even then underscored downside risks. It also slashed its inflation projections to 1.2 per cent from 1.6 per cent, underscoring again the ECB's longstanding inability to even approach its inflation objective.

Meanwhile, fiscal policy offers scant support. Countries that have fiscal space, such as Germany, may use it only sparingly. But others facing weakness - especially Italy, whose debt load poses an enormous stability risk to Europe and the world - don't have space. Nor does France, which is also being impacted by the "gilet jaunes" opposition. Discussions on a euro area fiscal capacity are making little headway.

The UK continues to flounder with its exit from the EU. European banks remain weak, as evidenced by Italian bank woes and improbable discussions on a possible merger of Deutsche Bank and Commerzbank - two unwieldy, low-profit banks, whose merger would pose enormous multiyear challenges for integrating systems, cultures and the like.

Emerging markets are perhaps somewhat of a bright spot. The Fed's pause has eased financing strains and outflow pressures. But emerging market positioning is already stretched. To the extent that lower global interest rates reflect weakening global growth, the latter can negatively impact commodity prices and emerging market exports to advanced economies. While emerging markets are in much better health now than during past advanced economy downturns, there are idiosyncratic weaknesses among some, renewed signs of froth in lending to these markets, and financial stability risks - such as crowded trades in domestic sovereign debt - are present.

The spring meetings will undoubtedly seek to call for a renewed sense of global cooperation and multilateralism and create a positive buzz. But the US is generating trade tensions for the world and understandably - and regrettably - seen as an unreliable leader and partner. China is fighting off its near-term economic malaise at the same time its growth model is facing rising internal contradictions between the state and markets. An introverted Europe is consumed by its own weaknesses.

Despite the outward appearances, international cooperation and multilateralism may unfortunately be in short supply at the spring meetings. Behind the curtains, they are likely to be a downbeat event. OMFIF

  • The writer is US chairman of the Official Monetary and Financial Institutions Forum.