TThe International Monetary Fund has been revised The world’s economic outlook is sober. It is rare for the organization to audit sharply reduced its projections for economic growth only one quarter inside the calendar year. But in this case, it has done so for 86% of its 190 member states, resulting in a drop of almost one percentage point in global growth for 2022 – from 4.4% to 3.6%. Moreover, this forecast is accompanied by a significant increase in expected inflation, and all this bad news is wrapped up in a wrapping of deeper uncertainty. There is a downward imbalance in the risk balance, and inequality is expected to worsen within and across countries.
The WEO revision attracts a lot of media attention. The focus is understandably on the relatively large size of the revisions for the current year, most of which are related to the detrimental economic effects of Russia’s invasion of Ukraine. The war has cut off the supply of maize, gas, metals, oil and wheat, as well as pushing up the price of critical inputs such as fertilizer (which is made of natural gas). This development has prompted warnings of a looming global food crisis and a severe rise in world hunger. Given the scale of the disruption, it would not surprise me if the IMF issued a further downgrade of its growth forecasts – particularly for Europe – later in the year.
But as important as these 2022 effects are, especially when it comes to the impact on vulnerable sections of the population and fragile countries, we must also be aware of the IMF’s 2023 outlook. The projection for next year points to a medium-term problem that is no less important: the lost strength of growth models worldwide. The IMF does not expect its significant downgrade of global economic growth for 2022 to be offset by 2023. Instead, it has lowered its forecast for next year from 3.8% to 3.6%, where these revisions apply to advanced economies and developing economies.
The implication is that the world’s economic engines are bouncing. This problem is particularly worrying in such a fluid operating environment because it means that the prevailing growth models are not up to the task of pulling economies through unexpected negative shocks. To make matters worse, the same models have also failed to maintain a decent level of inclusive growth during periods of less stress.
Three major secular developments are to blame for the lukewarm view: the changing nature of globalization; the long-term dependence on artificial growth enhancers; and the long-term lack of investment in the sources of sustained growth.
Economic and financial globalization has evolved in ways that make it more difficult for national economies to leverage international trade and foreign direct investment for domestic growth. While the pandemic raised questions about the proliferation and potential vulnerabilities of “just-in-time” cross-border supply chains, it is worth remembering that trade and investment restrictions were rising long before Covid-19 emerged. The trade war between the United States and China led to the return of high tariffs and other protectionist measures that have generated far-reaching contagious effects throughout the global economy.
Moreover, this development has come at a time when many countries are facing tighter political constraints. A return to conventional and unconventional monetary policy stimulus is now precluded by high and sustained inflation. As the IMF notes, this new environment confronts central banks with very delicate and problematic political considerations, and it exposes the real economy to the potential whims of financial market volatility.
Although the scope for fiscal action is less limited than for monetary measures, it is not well distributed between countries. While governments should use the firepower they have to protect the most vulnerable segments of their populations, some are already facing worrying debt levels.
This development coincides with a period of low productivity growth in many countries, which is a function of past and persistent lack of investment in the drivers of real growth, including physical infrastructure and human capital.
The IMF report provides an important reminder to policy makers that they need to focus much more on creating innovation, improving productivity and strengthening the other driving forces behind robust, including economic growth. If this is not done, the risk of growth stagnation in the medium term will be uncomfortably high. In a world already subject to significant climate, economic, financial, institutional, political and social challenges, this is not a scenario we can afford.
Mohamed El-Erian, president of Queens’ College at the University of Cambridge, is a professor at Wharton School at the University of Pennsylvania