The Monetarist Era is Over
LONDON – A mood of foreboding dominated this month’s annual meetings of the International Monetary Fund and World Bank in Washington, DC. But fear of a global recession was not the real cause. Although the latest update of the IMF’s World Economic Outlook showed economic activity slowing this year to its weakest level since 2009, the projected global growth rate of 3% is still far above levels associated with past recessions and would be consistent with decent economic conditions in most parts of the world – not a bad outcome for the 11th year of a sustained global expansion. And for next year, the IMF predicts that growth will accelerate to 3.4%, very close to the 3.6% estimate of the world economy’s long-run sustainable trend.
One might argue that the IMF’s forecast of a growth rebound next year merits limited credence, simply because all econometric models are designed in such a way that they tend to revert to long-term average trends. But the numbers for 2019 are different and much more credible. By this time of the year, the 2019 “projections” mostly reflect data that have already been collected. The numbers, therefore, largely reflect existing facts, such as the US-China trade war, the collapse of German car production, and fears of a no-deal Brexit.
The 2019 projections confirm the relatively benign picture of the global economy I described after the previous iteration of the IMF data. Despite their trade war, neither the US nor China has experienced any real weakening: growth in both countries has been downgraded by a statistically insignificant 0.1% since last October. Japan’s performance has also remained unchanged, and the rest of Asia has slowed only marginally. The main problem area in the world economy this year has been Europe, with projected growth in the eurozone revised downward by more than one-third, from 1.9 % to 1.2%, and from 1.9% to a near-recessionary 0.5% in Germany.
The bad news is that the relatively benign conditions still prevailing in the world economy will genuinely deteriorate at some point, even if not in 2020 or even 2021. At that point, central bankers will have to admit that they can no longer manage business cycles and moderate economic downturns. The less bad news is that most of these policymakers now recognize that other, more effective tools exist, and that only outdated political ideology and economic dogma are preventing them from being used.
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