In the past several months optimism appears to have taken hold with respect to the improving state of the global economy. Most recently the IMF has upgraded its forecast for world economic growth for 2017 from 3.4% to 3.5%, with increased growth estimates accorded to China (from 6.5% to 6.6%) as well as for the developed economies (from 1.9% to 2%). The scale of the upgrade is minimal, but the most important signal from the Fund is that sentiment seems to be improving with respect to global growth after years of frustrating underperformance. The question many observers will ask, however, is whether the current state of the world economy really merits even cautious optimism let alone buoyancy.
First and foremost, the IMF itself notes that the old sores that were blamed for the deceleration in global growth in the first place such as low productivity as well as high income inequality “are likely to persist and could stall a stronger recovery”. Furthermore, protectionism does not seem to be going anywhere – if anything after the abandonment of the Trans-Pacific Partnership (TPP) by the US the vector of US trade policy appears to be veering further towards protectionism. More generally, in terms of economic policy there remains the utter lack of what is frequently referred to as “comprehensive structural reforms” – the countries around the globe appear to be taking a break from intense competition.
In fact, not only have the structural problems of the world economy largely remained intact, there has arguably been a deterioration in the global economic conditions, including with respect to the geopolitical and security situation. The spreading of tensions to Asia Pacific, which in turn is currently one of the key drivers of global growth, is taking place alongside the continuation of tensions in the Middle East. In Europe the post-Brexit landscape is fraught with uncertainty with the nearing elections in France and lingering imbalances among the debt-ridden economies of EU’s southern flank.
And then there is the “irrational exuberance” in global financial markets. The recent upsurge in stocks is a double-edged sword – while pointing towards improved sentiment, the record high levels reached in some of the stock markets (including in the US) may pose risks in a scenario of Fed rate increases and the rise in global risk-aversion. And while the markets have opted to take a sanguine view on the future pace of Fed rate hikes, the implications of the “normalization” of US monetary policy are far from crystal-clear, meaning greater uncertainty and increased volatility later this year.
The gruesome picture depicted above may be too harsh to the tepid signs of optimism in the global economy after all. And indeed, it may well be the case that global growth will muster an improvement towards 3.5% or even higher growth this year. But the main point of the above rattling is that the quality of growth matters, most notably with respect to the sustainability of the recovery of the global economy in the longer term. On this particular count there are hardly any grounds for even cautious optimism so far.
Yaroslav Lissovolik is Chief economist with the Eurasian Development Bank, Programme Director of the Valdai Discussion Club.