While the world economy once more appears worse in the year’s second half, a regular feature of global growth forecasts from 2011, economic assessments and policy choices have reached a turning point. Opinion across the board, including that of the International Monetary Fund (IMF), is convinced that the advanced countries are trapped in ‘secular stagnation’—this is underpinned by a trend decline in real interest rates from fundamental forces like demography (ageing), slowing productivity growth, lower public investments, and so on.
In the light of this low-level equilibrium inflation, interest rates and growth, policies are seeing a significant shift. A fundamental shift in demand, where gross domestic product and investment have crossed pre-crisis levels in advanced economies but remain well below pre-crisis trends as per the IMF’s just-released World Economic Outlook, means that macroeconomic policies need readjustment to offset the potential output decline. This is not a job that central banks can do alone—although monetary policies must remain accommodative, fiscal measures must also supplement their efforts.
To uplift the growth momentum and avoid “a lasting downshift in medium-term inflation expectations”, the IMF says that fiscal assistance is necessary.
Measures advocated vary and are country-specific: free operation of automatic stabilizers in the UK for now with reappraisal of discretionary fiscal easing and reassessment of medium-term deficit targets ahead; fiscal policy should be deployed to support near-term recovery in the Euro area by funding public investments and other priorities in countries with fiscal space (e.g. Germany), supported with product, labour market, and public administration reforms.
The modest expansionary fiscal stance in the US needs supplementing by creation of fiscal room in the long term—a credible deficit and debt reduction plan will allow space for increasing infrastructure investments, labour force participation and augmentation of human capital, and in Japan, a host of structural reform measures along with a credible fiscal consolidation strategy to create the space for addressing temporary setbacks.
To be sure, such views about the nature of recovery in the advanced economies and appropriate policies to deploy had been building up these past few months. Several prominent economists and commentators have reasoned that the causes of pervasive deflationary tendencies and low growth outcomes needed a forthright action through a monetary-fiscal policy combine. These have now consolidated into explicit articulation from the IMF.
Political developments like Brexit and varying degrees of popular discontent with trade and globalization in different parts of the world have no doubt played a role. If in April the IMF had said global growth had been “Too Slow for Too Long” (World Economic Outlook, April 2016), by September this theme was expanded as managing director Christine Lagarde in the G20 summit at Hangzhou, China, said: “Growth had been too slow for too long for too few.”
The wide-ranging policy measures will take a while to implement, playing out differently across countries and subject to politics. Their success in uplifting demand in advanced countries will be anxiously watched, especially by the emerging economies that are specifically hurt by reduced trade. This time round, global growth is affected by new risks such as the Brexit kind, phrased as “political discord and inward-looking policies” by the IMF and perhaps accounting for the policy shifts.
Renu Kohli is a New Delhi based economist.