When ministers last gathered at a meeting of the International Monetary Fund, in October, there appeared to be good momentum behind a recovery, although some wobbles in the global economy were provoking concern. Six months later, the picture is considerably gloomier. The economies of the EU, the US and China are all looking weak, and the discussion is increasingly about engineering a soft landing rather than stopping growth flying too high.
Though the Federal Reserve has raised rates in the interim — a quarter-point hike in December, its fourth in 2018 — it has since shifted to a much more dovish stance, setting a high bar for future increases. And although the European Central Bank ended quantitative easing in December, it has emphasised that it remains prepared to keep policy loose well into the future.
Monetary policymakers, having previously been perhaps too eager to take the continued recovery as read, have got themselves in more or less the right position. But the same cannot be said of fiscal policy, which has delivered an ill-timed temporary boost in the US and continues to play an inadequate role in Europe. If the mood is not to be darker still when the IMF next meets this autumn, those governments with fiscal room to move will need to be prepared to do their part.
The view of the global economy can best be described as murky but unencouraging. True, concerns that the US was imminently headed into recession were assuaged by a strong payroll jobs report for March. Most economists think that US gross domestic product will rebound somewhat in the next three months after a weak first quarter. However, as it has for a decade, inflation has struggled to get to the Fed’s 2 per cent target.
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Having sharply changed course in January, the Fed’s open market committee (FOMC) consolidated its dovish stance in March, according to the minutes of the meeting released this week. Similarly, the ECB is in a holding pattern for now, with next month’s meeting expected to herald the important news on how the bank will manage its targeted longer-term refinancing operations to keep bank lending going.
There are at least a couple of vaguely bright spots in the global economy. One is that China appears to have stabilised its economy through government spending in the past few months, with municipalities encouraged to borrow for investment. There has also been some optimism that a deal with the US in its fraught bilateral trade talks may be near. However, while some risks to its stability may have declined, trend growth in China seems to have slowed.
Similarly, while some of the shocks that hit emerging markets as a whole last year — including higher dollar interest rates that forced countries with external vulnerabilities to tighten monetary policy — have eased, others such as weak global trade remain. It seems likely that emerging market growth in 2019 will be the lowest for some years.
Central banks have been doing more or less the right thing. In the Fed’s case, it needs to ignore pressure from Donald Trump, whose mooted appointments to the FOMC suggest his attitude towards the central bank is going from bad to worse. Yet if the global economy does weaken, particularly in the advanced economies, it will be time for fiscal policy to undertake some of the work it should have been doing for the past decade.
Given the lags and uncertainty involved in stimulus by tax and spending, it is not the ideal instrument for countercyclical policy. But if the downturn seriously threatens to become a slump, it could well become an indispensable one. (Financial Times)