Don’t be fooled. That was the simple message from the International Monetary Fund to policymakers as it boosted its forecasts for the global economy for both 2018 and 2019.
Sooner rather than later, the IMF believes, the recovery will peter out.
Growth in the US is being boosted by tax cuts that are not really necessary and could be stoking inflationary pressure. The headwinds to growth in the eurozone – an ageing population and what the IMF sees as a lack of commitment to economic reform – have not eased, but are being countered for now by the European Central Bank’s stimulus policies and by exports to the US.
What is the IMF?
The International Monetary Fund, created in 1945, is an organisation of 189 countries based in Washington DC. It is governed by, and accountable, to member countries.
Its goals are to ensure the stability of the international monetary system (exchange rates and international payments), to secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty.
The IMF has bailed out scores of countries over the years, including the UK in 1976 when the minority Labour government borrowed £2.3bn from the fund to stabilise the value of the pound; Iceland in 2008; and Greece in 2010, 2012 and 2015.
The number of bailouts of African countries has also increased in recent years as states became more vulnerable to commodity price crashes.
The IMF was conceived at a UN conference in Bretton Woods in the US in July 1944 to build a framework for economic cooperation to avoid the devaluations that contributed to the Great Depression of the 1930s.
Most funds for IMF loans are provided by members via payments based on their position in the world economy, although the IMF can also borrow. Its decision-making also reflects members’ relative influence. The Fund, as it is known, is one of the world’s biggest holders of gold.
The fund is concerned that Donald Trump’s tax cuts could eventually add to protectionist pressures. That’s because the US is already running a hefty trade deficit and the cuts will lead to stronger demand and a surge in imports.
By contrast, big exporting nations, such as Germany and China, will see their already large current account surpluses expand further unless they take action to encourage imports.
In the years leading up to the financial crisis of 2008-09, global imbalances between surplus and deficit countries were part of the economic landscape, but there are two key differences between then and now.
The first is that the biggest deficit nation – the US – is led by a president prepared to use protectionist policies to reduce those global imbalances. The second is that a decade of unusually weak real income growth across the west has made voters more suspicious of globalisation.
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“Anxiety about technological change and globalisation is on the rise and, when combined with wider trade imbalances, could foster a shift toward inward-looking policies, disrupting trade and investment,” the IMF says in its World Economic Outlook.
What ought to happen, according to the fund, is that governments should use the current window of opportunity to advance policies that lead to higher and more inclusive growth, and build up war chests ready for the next downturn. Or, as George Osborne once put it, they need to fix the roof while the sun shines.