The International Monetary Fund’s major downward revision to its 2022 World Economic Outlook, just a quarter into the calendar year, has generated headlines and concerns around the world. But no less important is the grim forecast for 2023, which implies a broader crisis of the prevailing growth models.
CAMBRIDGE – The International Monetary Fund’s revised version of the World Economic Outlook (WEO) is sobering. It’s rare for the organization to drastically revise down its economic growth projections for just a quarter of a calendar year. However, in this case, it has done so for 86% of its 190 member countries, resulting in a nearly one percentage point decline in global growth by 2022, from 4.4% to 3.6%. In addition, this forecast is accompanied by a significant increase in projected inflation, and all this bad news is wrapped in a package of greater uncertainty. There is a downward bias in the balance of risks, and inequality is expected to worsen both within and between countries.
The revision of the document published by the IMF has generated a lot of attraction among the media. The focus, understandably, is on the relatively large size of the revisions for the current year, most of which are associated with the detrimental economic effects of the Russian invasion of Ukraine. The war has destabilized or disrupted supplies of corn, gas, metals, oil, and wheat, as well as driving up the price of critical inputs like fertilizer (which is made from natural gas).
These developments have prompted warnings of a looming global food crisis and a severe increase in world hunger. Given the scale of the disruptions, I would not be surprised if the IMF were to issue a further downward revision to its growth projections, particularly for Europe, later this year.
But as important as these effects are for 2022, especially when it comes to the impact on vulnerable segments of the population and fragile countries, we should also pay attention to the IMF’s 2023 outlook. The projection for next year points to a no less important medium-term problem: the loss of power of growth models worldwide.
The IMF does not expect its significant downward revision to global economic growth for 2022 to be offset in 2023. Instead, it has lowered its forecast for next year from 3.8% to 3.6%, and those revisions apply to both economies advanced as well as developing.
The implication is that the world’s economic engines are sputtering. This issue is especially concerning in such a fluid operating environment, because it means that prevailing growth models are not up to the task of propelling economies through unforeseen negative shocks. To make matters worse, the same models have also failed to maintain a decent level of inclusive growth during periods of lower stress.
Three major secular developments are to blame for the lukewarm outlook: the changing nature of globalization; prolonged dependence on artificial growth drivers; and the long-term failure to invest in the sources of sustained growth.
Economic and financial globalization has been evolving in such a way that it is more difficult for national economies to take advantage of international trade and foreign direct investment for domestic growth. While the pandemic has 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 increasing long before Covid-19 emerged. The trade war between the United States and China was marked by the return of high tariffs and other protectionist measures that have generated far-reaching repercussions throughout the world economy.
Furthermore, these developments have come at a time when many countries are facing tighter political restrictions. A return to conventional and unconventional monetary policy stimulus is now impeded by persistently high inflation.
As the IMF points out, this new environment confronts central banks with highly sensitive and problematic political trade-offs, and exposes the real economy to the possible vagaries of financial market volatility.
Although the scope of fiscal action is less limited than that of monetary measures, it is not well distributed across countries. While governments should use whatever firepower they have to protect the most vulnerable segments of their populations, some already face worrying levels of debt.
These developments coincide with a period of low productivity growth in many countries, which is a function of past and persistent failures to invest in the drivers of genuine growth, including physical infrastructure and human capital.
The IMF report offers an important reminder to policymakers that they need to pay much more attention to generating innovation, improving productivity, and strengthening the other engines of robust and inclusive economic growth. Otherwise, the risk of stagnant growth in the medium term will be uncomfortably high. In a world that is already subject to considerable climatic, economic, financial, institutional, political and social challenges, that is not a scenario that we can afford.
The author
president of Queens’ College, University of Cambridge, is a professor at the Wharton School of the University of Pennsylvania, and the author of The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse.
Copyright: Project Syndicate 1995 – 2022