The International Monetary Fund (IMF) has called for the leaders of the world’s leading economies to make a positive case for globalisation after voicing concern that prolonged slow growth and rising inequality is eroding support for free trade and open markets.
In a report published before this weekend’s gathering of the G20 group of developed and developing nations in China, the fund warned that slower than expected growth in the US and the knock-on impact of Brexit were likely to result in a fresh downgrade of its forecasts for global activity in 2016.
The death of neoliberalism and the crisis in western politics
While expressing relief that the financial markets had stabilised after the turmoil in the days after the UK’s EU referendum on 23 June, the IMF signalled that it would be revising down its July prediction of 3.1% growth for this year when it publishes its World Economic Outlook next month.
The fund’s Global Prospects and Policy Challenges – prepared for the G20 meeting – said recent data had shown “muted activity, slower trade growth, and very low inflation, pointing to an even more modest pace of global growth this year.
“Despite record-low interest rates, investment continues to disappoint, reflecting demand conditions as well as high corporate sector debt and weak financial sector balance sheets in many countries.”
Christine Lagarde, the IMF’s managing director, used a blog to call on the G20 to adopt a four-pronged approach that would result in more economic stimulus, structural reform, a renewed commitment to free trade and a more equitable division of the proceeds of growth.
“It takes political courage to implement this agenda”, Lagarde said. “But inaction risks reversing global economic integration, and therefore stalling an engine that, for decades, has created and spread wealth around the globe. This risk is, in my view, too large to take.”
Recent developments have led to heightened concern at the fund about the drift towards economic nationalism. Both candidates in the US presidential election have expressed opposition to the free trade deals being sought by Barack Obama.
The IMF managing director said 2016 would be the fifth consecutive year in which global growth was below the 3.7% average recorded in the period from 1990 to 2007.
“The political pendulum threatens to swing against economic openness, and without forceful policy actions, the world could suffer from disappointing growth for a long time.”
The G20 will give world leaders an opportunity to discuss the consequences of Brexit with Theresa May, who will be attending her first summit as prime minister.
Although the IMF has rowed back from its forecast that the UK would go into recession following the Brexit vote, its G20 report still predicts a “sharp slowdown” following the result of the referendum. “Further ahead, the outlook will be affected by the degree to which the future relationship with the European Union can preserve the benefits of economic integration and trade.”
For the world economy as a whole, the IMF said low and falling growth coupled with rising inequality made for a challenging policy backdrop. Weak prospects for growth could depress investment and slow down trade, leading to even weaker demand and limiting the scope for productivity gains. “At the same time, income growth has not only been meagre, it has bypassed low-income earners in many countries, raising anxiety about globalisation and worsening the political climate for reform.”
The report said there were more downside than upside risks to its forecasts, with low inflation, China’s transition to an economic model less dependent on exports and the uncertainties caused by Brexit – particularly for other European countries – singled out as specific concerns.
“Financial markets have largely recovered from their lows following the United Kingdom referendum, but potential weaknesses remain in the financial sector. While political uncertainty remains concerning the development of the relationship between the United Kingdom and European Union, short-term turbulence has ebbed. Bank equities remain under pressure, however, with particular tensions surrounding Italian banks.”