Too Slow for Too Long

THIS year’s Spring Meetings of the International Monetary Fund (IMF) and the World Bank were held in Washington D.C. against the backdrop of political turmoil in Brazil, political transformation in the U.S. and, most significantly, a weakening global economy. Most of the finance ministers and central bank governors in attendance expressed profound concerns about the health of the global economy, particularly the potential of a financial crisis in any major economy or region to trigger a global recession.

As the prospects for increased global trade now appear gloomy and growth rates continue to slide, world financial leaders have proposed a mix of policy options to stem the tide of economic decline and maintain financial stability. Predictably, there was much consensus on what’s needed: “A three-pronged approach of structural reforms together with fiscal and monetary policy – to lift slowing growth.”

No doubt with a deep sense of foreboding, the new chief economist at the IMF, Maurice Obstfeld, has pointed out that policymakers need to get it right if they are to avoid economic turbulence in the future: “Lower growth means less room for error. Persistent slow growth has scarring effects that themselves reduce potential output and with it, demand and investment,” he said.

Similarly, in a recent speech entitled “The Case for a Global Policy Upgrade”, IMF Managing Director Christine Lagarde cautioned that “the recovery remains too slow, too fragile, with the risk that persistent low growth can have damaging effects on the social and political fabric of many countries.”

By all accounts, the world economy is still in the doldrums and global trade is likely to remain sluggish, prompting the IMF to make yet another downward revision to its prediction for global GDP growth. Its recent World Economic Outlook Report has nudged down growth prospects for 2016 from 3.4% to 3.2%, citing factors from slow growth in China and recessions in emerging economies like Brazil and Russia to declining confidence in policy traction and weak commodity markets.

On the whole, the picture painted of the world economy in the WEO Report is not a flattering one: “Major macroeconomic realignments are affecting prospects differentially across countries and regions. These include the slowdown and rebalancing in China; a further decline in commodity prices, especially for oil, with sizable redistributive consequences across sectors and countries; a related slowdown in investment and trade; and declining capital flows to emerging market and developing economies. These realignments—together with a host of non-economic factors, including geopolitical tensions and political discord—are generating substantial uncertainty. On the whole, they are consistent with a subdued outlook for the world economy—but risks of much weaker global growth have also risen,” it observes.

Crucially, if oil prices begin to slide again, this could probably place the world economy at even greater risk, as fragile oil and gas firms already face $2.5 trillion in debt and budgets in oil-producing countries are severely strained. For what it’s worth, the chief economist at the Fund has said that “the recent recovery in crude prices will take some pressure off oil producers, but “we won’t be seeing prices at the $100 a barrel level for some time, if ever.”

According to the Fund’s Monetary and Capital Markets Director, José Viñals, “Over the last six months, the threat of global financial instability has increased.” Mr.Viñals noted that corporate bank loans posed a potential risk that could amount to nearly 1.3 trillion U.S. dollars.

Not particularly helpful, either, is the planned referendum on Britain’s EU membership, which the IMF believes will have serious implications for the world economy. For some time now, there have been dire warnings about the consequences of any decision by Britain to leave the EU on the grounds that it will disrupt trade relations and financial flows, and hence pose a considerable threat to global economic stability.

Already, anxieties over Britain’s possible departure from the EU have shaken confidence in the pound sterling, prompting investors to hold off putting money into the U.K. until the results of the looming referendum are certain.

Yet, even while world financial leaders were proposing concrete measures to deal with slow growth, capital outflows and deflationary pressures, political leaders and economists elsewhere were warning against the misguided incentives of negative interest rates worldwide, which they say only punish savers and negatively impact on the profit margins of commercial banks, whose financial stability central banks are supposed to ensure in the first place. Germany’s finance minister has said that he is concerned that “the unchecked creation of money could lead to new bubbles on the financial markets.” It’s now being reported in the EU press that several large EU states are deeply frustrated over the European Central Bank’s zero percent interest policy, but are afraid to voice their concerns in public.

Meanwhile, Moody’s Investors Service has downgraded Trinidad and Tobago’s ratings to Baa3 from Baa2 and assigned a negative growth outlook to the country. Moody’s rational for the downgrade reads as follows: “Low oil and gas prices will negatively affect the country’s economic and government financial strength at least throughout 2018. Trinidad and Tobago is highly dependent on hydrocarbons as economic growth drivers. Oil, gas and petrochemical sectors account for 91% of total exports and 35% of GDP.”

If the world economy did indeed slide into a serious recession, would that be the final straw for small vulnerable economies in the Caribbean and elsewhere? At a time when small island developing states around the world are beginning to recover from the debilitating financial crisis of 2008, the last thing they need is a spanner in the works in the form of reduced demand, trade and capital flows in the global economy.

For comments, write to [email protected] – Clement Wulf-Soulage is a Management Economist, Published Author and Former University Lecturer.