What to expect from the IMF World Economic Outlook today

At their last outing, less than three months ago in October 2017, the IMF sent a two-part message. First, it affirmed that in the near term, global growth is set to continue on its positive momentum. At the same time however, it raised questions about the long-term sustainability of the type of growth that we are witnessing. Which of these two will command greater emphasis today? (22 Jan 2017)

Over the last eighteen months or so, when it comes to economic outlook, we have had a massive mood swing.

Since the WEO report of October 2016, we have moved from “subdued” to sanguine to almost celebratory.

In 2018, we run the risk of getting ahead of ourselves. Global markets - led by the S&P which has had its longest winning streak since before the great crash of 1929 - are ebullient. One investment bank’s research is headlined as “As Good As It Gets” while another is titled “Skating in Sync”. 

Back in late 2016, we were in the midst of a political shock represented by the Brexit referendum, the Trump election and a forthcoming series of elections in Europe. In economic terms, we’d almost given up on growth in advanced economies (‘stagnation’ being the buzzword). China was causing anxieties not only because of the perceived shakiness of its credit profile but also because it was buying fewer commodities from the rest of the world. The IMF’s update of January 2017 was given the non-committal title of “Shifting Landscape”. It acknowledged early signs of acceleration in growth and a re-pricing of financial assets but highlighted policy uncertainty as the main reason for “a wider range of upside and downside to our forecasts”. 

Since then, we seem to have dodged several bullets: 

Growth in advanced economies has been broad-based across all the three longitudes of North America, Europe and Japan. GDP growth surprised to the upside in all three regions. China did not fall off the rails. Apparent outperformance in growth was not accompanied by proportionate increase in credit, even though the stock of credit remains high. China is also buying commodities again which is good for the rest of emerging markets. The world as a whole looks sturdy enough to live with both high oil price and higher interest rates. 

What could possibly go wrong? In order to answer that, one must look at what has NOT changed. 

Arguably, too much of the heavy-lifting is still conducted by monetary policy. Too many of the sources of recent growth have come from “re-fuelling” of historical sources. Credit overhang remains high and in some place such as emerging markets corporate debt, vulnerable to a sudden shift in investor confidence. Remember, mood swings can swing both ways. Not enough has been done on the fiscal side of the ledger and not enough has been invested in infrastructure. Structural reforms (some of which might result in a short-term dip in growth, as seen in India) have been few and far between. And international cooperation around trade, climate-change or finance has not advanced, potentially weakening the resilience of interconnected systems.

Finally - and perhaps most importantly - the distributional consequences and social dislocation brought on by technological change and elements of globalisation have not been tackled at a structural level. It is not sufficient to tackle exponential change with linear responses. The longer that we ignore these risk factors, the greater the impact when things go wrong.

Here at Davos today, the sun is set to shine both literally and metaphorically. I just hope that in the glare of this sunlight reflecting from the snow, we do not fail to see the obvious ‘grey rhinos’ getting ready to charge!