IMF report: in the new normal of the post-GFC world, sideways is the new up

The latest IMF world economic outlook released on Wednesday suggests stagnant growth for the year ahead, and warns that unless nations take efforts to shift their economies out of the rut, political movements against trade will continue to thrive and will also likely lead to lower growth in the future.

Since the GFC, the IMF world economic outlook reports have made for pretty depressing reading. Titles such of “Too Slow for Too Long”, from April this year, are about as cheery as it gets. This time the title “Subdued demand: Symptoms and Remedies” reflects the continuation of this generally downcast outlook.

It says something that the bright aspect of the report is the suggestion that while things are not really getting better for the world economy, neither are they getting worse. Instead the IMF finds that the world economy is “moving sideways”.

Woohoo!

This has meant for the first time in a long while there was no significant downgrade in the projection for world GDP growth.

The 3.1% growth that was predicted in July remains in place. That’s good news (of sorts) but a long way below the IMF’s highest estimate back in September 2011 of 4.9%:

But while the world GDP growth prediction remains steady, the outlook for advanced economies has been revised down yet again – from the 1.8% in July to just 1.6%, and massively down on the 2.2% predicted a year ago.

The two big reasons for the slow-down in the advanced economies is a weaker than expected growth in the USA and the fallout from the Brexit vote.

This time last year, the IMF was expecting the UK economy to be growing by 2.2%. The uncertainty of the Brexit vote saw them downgrade that to 1.9% in April and 1.7% in July. The good news is the IMF now expects the UK to grow by 1.8%.

But when asked if this showed that the IMF had overestimated the impact of the Brexit vote, Maurice Obstfeld, the director of the IMF research department argued the sharp devaluing of the UK pound had helped keep the UK’s economy growing better than would be expected (as it made its exports) but that the long term issues remained.

For Australia, the situation is better in the short-term as well. The IMF has upgraded our forecast growth for this year from 2.5% to 2.9%:

Alas the upgrades for Australia and the UK don’t continue into next year.

The IMF downgraded the growth projection for Australia in 2017 from 2.5% to 2.2%, while the projection for UK growth has been halved in the past 12 months. Last year the IMF anticipated the UK’s economy growing by 2.2% in 2017; now it expects a pitiful 1.1%:

The slowdown in the USA, where the IMF has downgraded growth projections for this year from the 2.2% in July to now just 1.6% is due mostly to falling business investment and “diminishing pace of stockpiles of goods”.

That such a slowdown appears not to have affected the likely chances of Hillary Clinton winning the election highlights how much better the chances for the Republican Party would have been had they not picked Donald Trump as its candidate.

The IMF does note that the continued “subdued” growth is having political impacts. It says that the slow recovery after the GFC has been “especially damaging in those countries where the distribution of income has continued to skew sharply toward the highest earners”. In short, the IMF argues, “growth has been too low for too long, and in many countries its benefits have reached too few.”

They suggest the impact of inequality has been a driver of a “political movement that blames globalisation for all woes and seeks somehow to wall off the economy from global trends rather than engage cooperatively with foreign nations.”

The IMF argues that because international trade is a key driver of economic growth, the movement to increase trade barriers will “likely to depress global growth further.”

Instead it argues that nations need to work together. On this score the IMF remains praising of the efforts by Joe Hockey and Tony Abbott when hosting the G20 conference in Brisbane in 2014 to co-ordinate a growth target.

The IMF argues that to spur stronger growth, economic policies must be comprehensive – pointedly arguing against relying on low interest rates, and instead arguing for more fiscal stimulus.

Here the IMF points to the stimulus provided this year by the Canadian government and in the United States.

The data shows that the Australian government remains more focused on reducing the deficit and leaving the work of stimulating the economy mostly on the shoulders of the Reserve Bank:

The good news for Australia is that we look to be well past the peak of our unemployment. Concerns the unemployment rate might remain above 6% this year and into 2017 have been replaced with predictions of it being down to around 5.3% by the end of the decade:

Australia’s economy also continues to do well among its economic peers.

The IMF estimates Australia will continue to grow stronger than most non-developing nations in the G20:

It also continues to estimate that India will be the fastest growing economy out to 2021.

But China continues to be engine for world economic growth. While the USA’s economy will remain the largest in the world, China will drive significantly more of the growth of world GDP than the USA and a great deal more than India:

In the new normal of the post-GFC world, sideways is the new up.

The lack of major downgrades to growth projections makes a nice change, but shows that keeping on with the policies of the pre-GFC world, where monetary policy was considered to be the best way to stimulate the economy, is not up to the task.

Australia’s growth continues to do well compared with other nations, but below what was once considered average. And so long as the government is more concerned about budget “repair”, that is likely to be the case.