Sunday, April 24, 2022
A groggy global economy has lost its mojo
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt. Not to be reproduced without permission.

It is a while since I have done it but there was a time when no year was complete without two pilgrimages to Washington for the annual meetings of the International Monetary Fund and World Bank, the “twins” which owe their existence to the Bretton Woods conference of 1944, the 80th anniversary of which we will soon be marking.

The spring and autumn IMF/World Bank meetings were where the world’s financial movers and shakers gathered, and mainly still do, not just finance ministers and central bankers but also a huge private sector contingent.

These gatherings used to move markets, particularly the smaller G7 meetings of finance ministers and central bankers, but it is a while since they have done so. It means that a lot of the interest is generated by the IMF’s new view of the world economy, published a few days ago.

IMF forecasts are often mocked for their accuracy, as are most economic forecasts. But there is no document as comprehensive in its analysis of the global economy as its World Economic Outlook, published twice a year, in April and October, with updates in January and July.

The big stories of the IMF’s new forecast are well known. Had the UK government not made such a thing of its “fastest growth in the G7” boast, I do not suppose this aspect of the new forecast would have got as much attention as it did.

But the new forecast shows that the UK’s growth of 3.7 per cent this year is pipped by Canada and equal to America. I pointed out last week that, thanks to lockdown quirks, the UK can get 3.7 per cent growth in 2022 even if the economy flatlines for the rest of the year. Next year, with predicted growth of 1.2 per cent, the UK is at the bottom of the G7 league. From hero to zero. Those who live by the IMF sword die by it.

That, while embarrassing, was not the big story. It was that, thanks to the Russian invasion of Ukraine, the global growth outlook has deteriorated. In January the IMF expected 4.4 per cent global growth this year. Now it is 3.6 per cent, a big revision in matter of weeks. The growth prediction for advanced economies is revised down from 3.9 to 3.3 per cent, and that for emerging and developing countries from 4.8 to 3.8 per cent.

At the heart of the conflict, Ukraine’s economy is predicted to contract by 35 per cent this year and Russia’s by 8.5 per cent. The impact on the rest of the world is “worldwide spillovers through commodity markets, trade, and financial channels” and “even as the war reduces growth, it will add to inflation”. Governments, having spent heavily fighting the pandemic, have limited room to spend to offset these effects, according to the IMF. Rishi Sunak would concur with that.

I do not want to focus today on the UK’s fall from IMF grace, or the negative economic impacts of the Russian invasion. What struck me most about this new set of forecasts was how downbeat they are. The IMF predicts out to 2027 and, when the dust settles following all the pandemic distortions, a muted picture it is.

We used to think of 4 per cent annual growth for the world economy, on the IMF’s measure, as something like the norm. Now it is expected to settle down at about 3.3 per cent. From 1990 until the mid-2000s advanced economies grew by an average of 2.7 per cent a year, perhaps partly on a diet of unsustainable finance.

But advanced economy growth is predicted to settle at just 1.6 per cent a year on average. You do not need many years stuck at this lower growth for the cumulative effects to be significant. The world economy, it seems, has lost its mojo.

There are some notable underperformers among G7 economies, notably Italy and Japan, which settle down to growth at no better than 1 per cent in the medium-term, and well below that according to the IMF. The UK has its own problems because of Brexit, though the IMF’s projections have an odd bounce in growth in 2025 for the UK, which may be a reaction to the weak growth of the previous two years. But the slow-growth malaise is also expected to affect America, which is expected to settle at just 1.7 pe cent over the medium-term.

These projections may be too downbeat, a bit like long range weather forecasts, though economists are better at assessing medium and long-run growth prospects than short-term shifts. What is going on?

There are three factors at work here. Global growth never got back properly to previous levels after the global financial crisis, which morphed into the eurozone crisis. And if one crisis was hard to take, two more, the pandemic and the Russian invasion of Ukraine have made things worse. We have yet to see the full impact of a potential Russian default, which at one time was enough to make financial markets shudder. The global impact of higher US interest rates, increased in response to the inflation shock, could be significant, particularly for emerging market economies, where there is talk of a new crisis. A groggy world economy is reeling under a series of blows.

Second, a particular weakness, since the first of these crises, has been world trade. World trade growth, which during the high watermark for globalisation in the 1990s and early 2000s often grew at double the rate of global GDP, now struggles to match it. Protectionism, favoured by populist, nationalist politicians like Donald Trump, pared back globalisation and has helped to make the world poorer. No longer is world trade the engine of growth it used to be.

Related to this is a third factor, the loss of momentum from China. China, having grown by an average of nearly 10 per cent a year since the late 1970s is now, at best, a 5 per cent growth economy. The IMF expects 4.4 per cent this year 5.1 per cent next. Part of this is due to the resistance China now faces, including the Trump trade barriers that have been retained by the Biden administration, but much of it is due to the internal contradictions of the Chinese growth model and a surely futile attempt to pursue a zero-Covid strategy.

India, which Boris Johnson has been visiting, fares better and can sustain growth of 7 or 8 per cent a year. But it is a much smaller economy, and instinctively protectionist.

We cannot easily turn the clock back to a time of stronger global growth but that does not mean nothing can be done. Rolling back protectionism would be a start. That includes this country, which has increased trade barriers with its biggest trading partner.