Not much has gone right for the global economy this year, and plenty has gone wrong. Two big regional wars are destabilising prices and supply chains everywhere. Businesses and consumers are feeling the effects of a serious energy shock. Rising inflation has made it a lot more expensive for governments to finance their debts. China and the US are at loggerheads over trade.
Yet, so far, the impact has been modest. It is something of a miracle that the finance ministers and central bank governors gathered for this year’s annual meeting of the International Monetary Fund (IMF) in Bangkok are not having to deal with a full-blown crisis. This is not like the autumn of 2008, when the meetings took place during the worst of the global banking meltdown.
The IMF is right when it says countries have shown resilience when having to cope with so many headwinds. It could have been worse. A lot worse. There was even some good news for the UK, with the IMF upgrading its growth forecast for this year and praising the government for its deficit-reduction plan.
The better-than-expected performance of the global economy breaks with historical precedent. In the past, oil shocks of the magnitude witnessed since the start of Iran war have had a marked and immediate impact, but there are three key reasons why growth has remained robust and inflationary pressure has been muted this time.
The first is the massive amount of investment in the development of artificial intelligence. This has been particularly important in the US, which is comfortably the fastest growing member of the G7 group of major developed economies year on year. The second is that countries have drawn on inventories of oil, and that has helped to alleviate the loss of crude from the Middle East. Had stockpiles not been run down, oil prices would have risen even more sharply. The third is that China’s economic strategy relies on exporting cheap goods to the rest of the world, and this is bearing down on the prices of imports elsewhere.
All that said, the potential flashpoints for trouble are everywhere. The situation in the Middle East is deteriorating, with the conflict spreading to Saudi Arabia. Oil stocks are running low and Donald Trump has got the US into just the sort of forever war that he used to rail against. The downside to cheap Chinese goods is that they are threatening manufacturing jobs in the west, with Germany especially vulnerable.
Meanwhile, massive US investment in AI has pushed up the cost of borrowing and resulted in shortages of capital for non-AI sectors. Governments are coming under pressure to rein in spending or raise taxes in the hope that bond markets will be impressed by their efforts to cut budget deficits.
Warnings from (among others) the head of the IMF, Kristalina Georgieva, and the governor of the Bank of England, Andrew Bailey, of the need to run a tighter fiscal ship come at a time when voters want politicians to do more, not less. There is little appetite for a new era of austerity, and finance ministers know it. If they follow through on the tough talk and actually deliver painful measures, the backlash is likely to be brutal.
Just as big a problem for governments is the need – at a time when global supply chains are stretched and fragile – to boost national self-sufficiency. The student protests in India and France highlight the pressures on states to intervene. Yet the capacity of states to act effectively is much weaker than they care to admit.
At a time when globalisation is in retreat, there is a need for a strong system of multilateral cooperation to cope with the strains. That is not currently the case. The World Trade Organization is moribund in this new age of protectionism, and the IMF and the World Bank are reluctant to call Trump out for his erratic behaviour.
Yet the idea that a new era of partnership will flower when there is a new US president is for the birds. The problems of multilateralism run far deeper than that. The liberal world order that the IMF and World Bank have presided over since the end of the second world war was dysfunctional long before Trump arrived in office.
As the former UN official Richard Kozul-Wright points out in a paper published next month, the IMF and World Bank – created at the 1944 Bretton Woods conference – may still be operational but they have lost their connection to the New Deal principles laid out 82 years ago: state intervention in the running of economies, active industrial policy, the pursuit of full employment and help for poor countries to develop. “Instead, they have in recent decades pursued an agenda which encourages footloose capital, bolsters (and protects) private profit, and reduces the policy space available to governments. As a result, they have acted as hand maidens to an age of rising inequality, debt distress and heightened anxiety.”
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The IMF’s own programmes for countries that come looking for financial assistance illustrate Kozul-Wright’s point about the lack of policy space. Help comes with strings attached: an insistence on tax increases and spending cuts that are frontloaded so that half the measures are implemented in the first year and two-thirds within two years.
The IMF argues that this “tough love” has a higher chance of success, although its view of what constitutes success is limited, and primarily means that a borrowing country doesn’t need another IMF programme in the next three years. It doesn’t mean living standards are improving or that fewer people are in poverty.
Clearly it would help to return to New Deal principles. It would mean governments had more policy space to develop strategies tailored to their own needs. It would mean a boost to public investment. It would mean a new Marshall plan to help poorer countries cope with the climate crisis. It would mean a serious attempt to tackle debt distress. But, in all honesty, none of that has a chance of happening any time soon. As a result, the world will become hotter, more fractured, more prone to conflict, less equal and a lot angrier.
The IMF is worried that the limits of this resilience may soon be tested, and it is right to be worried. Peace in the Middle East would bring oil prices tumbling down, but unless that happens quickly a long winter lies ahead. This looks more like a crisis postponed than a crisis permanently avoided. A lull before the storm, in all probability.
