Policymakers from some 180 countries wrapped up the spring meeting of the International Monetary Fund and World Bank in Washington on Sunday with a warning: Take steps now, while the global economy is still strengthening, to head off escalating risks of instability looming just over the horizon.
The message was reminiscent of the “yes, but” theme that dominated the same group’s annual meeting in October 2017. The consensus over the weekend was that the pace of growth had picked up in the intervening months, but so had the scale of the threats to it.
In the run-up to the meeting, the IMF’s revisions to its World Economic Outlook were dominated by predictions of faster growth than had been forecast six months ago. The accompanying message, crystallized in the communique of the International Monetary and Financial Committee issued on Saturday, welcomed stronger and more broad-based growth around the world. But it also warned about intensifying risks beyond the next several quarters and urged an expeditious response while positive economic conditions give policymakers latitude to act.
“While the sun is shining, we are seeing more clouds accumulating on the horizon,” said IMF Managing Director Christine Lagarde in her speech to delegates. She urged countries to “fix the roof” with sunshine prevailing.
The Power of Compounding
In today’s global economy, sunlight can enhance possibilities of stimulating virtuous economic, financial, political and social cycles, both within countries and across borders.
Given the extent of economic and financial interdependencies, the benefits of many countries growing at the same time are often larger than simple addition would suggest. That’s an argument in favor of simultaneous movement toward enacting more pro-growth policies, and on reducing what has been a decade’s worth of excessive reliance on unconventional monetary policy, including enormous central bank bond-buying programs.
Taken together, these measures would improve the ability of countries to service the large debts accumulated by both private and public sectors in recent years, something that the IMF felt the need to sound an alarm about. And by opening the door to an orderly validation of elevated asset prices, this would reduce the risk of financial instability down the road.
The potential payoff is not limited to economics, finance and policy. Higher and more inclusive growth could lower political anger and trade tensions and counteract social pressures associated with the widening of inequality of income, wealth and opportunity.
Three T's and Three D’s
There are two main reasons why taking these logical steps won’t necessarily happen, either easily or automatically.
First, the global economy faces structural uncertainties and headwinds. As I argued last week, the world economy is already in the midst of three major transitions – in equity market volatility, economic policy and global growth. The environment was captured well over the weekend by David Lipton, the IMF’s first deputy managing director, who spoke of “Three T’s” representing notably large and unpredictable economic forces. (Lipton’s Three T’s shouldn’t be confused with the ones cited almost 10 years ago by the former White House economic adviser Lawrence Summers when he coined the formula “targeted, timely and temporary” to help shape the policy thinking coming out of the 2008 global financial crisis.)