On October 13, Jeffrey Franks, Director of the International Monetary Fund’s Europe Office and Senior Representative to the EU, gave a presentation on the IMF’s current global economic outlook and challenges, following the Annual Meetings of the IMF and World Bank, which were held from October 7-9 in Washington DC. He was introduced by Uwe Walz, Professor for Industrial Organization at Goethe University Frankfurt.
State of the World Economy
According to Franks, the world economy is still facing the challenges and problems which were created by the financial crisis of 2007-08. He summarized the IMF’s view on the global economy in the words of Christine Lagarde, Managing Director of the IMF: “Economic growth has been too low for too long, benefiting too few people.” Not only is economic growth weak by historical standards, it is especially low given the fact that the world economy just came out of a recession. After previous recessions, there was usually a bounce back with high growth rates, which however has not been the case in the years following the financial crisis of 2007-08. This sluggish economic growth of the world economy has been dubbed “secular stagnation” and “the new mediocre” by economists and analysts. Franks pointed out that the eurozone as a whole only recovered to pre-crisis GDP levels in 2016, nine years after the financial crisis, and the IMF predicts Italian GDP not to recover to pre-crisis levels until 2025.
Regarding the advanced economies, the IMF slightly revised down forecasts for US GDP growth to 1.6%. While initial problems after the Brexit vote were contained and financial markets have largely recovered, the IMF still predicts that the Brexit will have a significant negative effect on UK’s GDP growth over the next ten years. The main reason is the considerable difficulties in negotiating bilateral trade agreements, which might take a long time. Overall, the IMF’s outlook for growth in advanced economies is mediocre, mainly because of the predicted sluggish growth in the US.
Emerging Market Economies
Regarding emerging market economies, Franks put forward a good news/bad news story: On the good side, the IMF expects the Brazilian economy to have hit bottom and being back on the path to growth. The Chinese economy is predicted to be less exposed to downward risk than previously thought. Franks argued that policy measures in China have shown positive effects, and that economic growth is decent. On the bad side, the IMF forecasts for Africa, Mexico and the lowest income countries have been revised downwards.
The IMF thinks that there are still significant risks in the world economy. Moreover, the nature of these risks is changing in a challenging way. Franks argued that while purely economic risks are declining, political downside risks are rising. Franks specifically named Brexit and the rise of populist political movements in most Western countries as examples for political risks. He argued that an increase in income inequality in many countries might be one of the reasons for the rise of a populist push back against traditional ways of managing the economy. Moreover, Franks named the refugee crisis and geo-political tensions in Syria and the Ukraine as other political risk factors.
Fiscal Sector Risks
As a final risk factor, Franks addressed the current state of the financial sector in Europe. The IMF considers banks in many European countries to be still weak and weak bank lending as one of the factors dragging down the real economy in many countries. Franks specifically named the problem of non-performing loans on banks’ balance sheets as an issue that needs to be solved. Moreover, Franks said that the IMF is strongly in favor of a European banking union and measures that strengthen banks’ capital levels.
The IMF recommendations to address these economic challenges follow a three-step-approach encompassing fiscal, monetary and structural policy measures. According to Franks, all policy measures need to emphasize the need of spreading the benefits of economic growth more equally. On the fiscal side, Franks suggested changes in the taxation structure, since all tax benefits of the last 20 years have benefited higher incomes, as he pointed out. With regard to monetary policy measures, the IMF is strongly in favor of the ECB’s expansionary monetary policy. However, Franks also noted that the ECB cannot stimulate economic growth in Europe alone. With regard to structural reforms, Franks emphasized the need of training the work force in many countries to adapt to changing labor market demands. He put forward the example of steel workers in Pennsylvania who would need to be trained to become care workers or programmers. Franks also acknowledged that these deeper structural issues would be challenging to tackle.