Although the news has been less dominated during the past 12 months, or so, with talk of the global financial crisis and its aftermath, the IMF is still deeply concerned with the state of the world economy. Hence, the quotation above, which is the somewhat gloomy sub-title of the organisation’s World Economic Outlook, October 2014.
To quote from the report:
“The world economy is in the middle of a balancing act. On the one hand, countries must address the legacies of the global financial crisis, ranging from debt overhangs to high unemployment. On the other, they face a cloudy future. Potential growth rates are being revised downward, and these worsened prospects are in turn affecting confidence, demand, and growth today.”
In addition, the IMF is talking about the evolution of a global economy which has become more differentiated. Amongst the advanced economies, the US, UK and Japanese economies are growing, albeit more slowly than a decade ago. Meanwhile, the Eurozone economy stalled earlier this year and looks like growing only slowly. The main emerging economies of China and India are growing, but also more slowly than previously. Elsewhere, growth prospects in Russia and Brazil are clouded by uncertainty.
Against this background, the IMF talks positively about the work done to engender stability and trust in financial systems, but it remains downbeat because it sees three significant risks. The first is that standard tools to maintain the health of the world’s financial systems may not be sufficient to maintain growth. The second is that geopolitical conflicts (e.g. in the Ukraine and Middle East) could make energy prices volatile and disruptive to growth. The third is that the Eurozone economy might not actually recover and could plunge into deflation.
In order to manage these risks, the IMF prescribes continued “monetary accommodation” and low interest rates. It also suggests the use of fiscal policy – for example, to fund infrastructure investment - to help sustain the recovery. Over and above these responses, structural reforms – which are not defined but may include such as deregulation, privatisation and the removal of trade barriers – are seen as potentially helpful. Most of all, however, the IMF considers that the challenge for policymakers is to re-establish confidence by articulating a clear plan to deal with both the legacies of the global financial crisis and the challenges of low potential growth. By implication, the IMF does not yet see a clear plan.