The world in 2019 – an interview with the IMF

Jeffrey Franks, Director of the IMF Europe Office and Senior Resident Representative to the European Union, International Monetary Fund discusses the world in 2019 and some of the key risks facing financial markets

Insurance Investor Editorposted on Thursday, November 21, 2019

Many will have seen that in October 2018 we released an update of the World Economic Outlook.

The figures for 2018/19 were 3.7 per cent global growth, a number revised down from six months ago, but still not a bad number by recent standards.

While the overall picture is not that bad, that there are a lot of risk factors accumulating and there are storm clouds on the horizon.

The slight downward revision for advanced economies reflects some downward revisions in 2018 for the UK, Japan, the Euro area in particular – where Germany’s figures in Q3 fell into negative territory, which may lead to further revisions for 2018/19 – but you can see it is a picture where every country is growing, just not fantastically.

Growth in developing nations has slowed

Emerging markets saw more significant downward revisions than advanced economies. The revision is of 0.2 per cent in 2018 and 0.4 per cent for 2019.

The picture is much more mixed here, as we see some emerging crises in isolated emerging markets.

The challenge is whether the emerging market problems that we are seeing today in Turkey, Iran, Argentina, etc., are going to become a more generalised emerging market problem in the future.

Brazil also had a significant downward revision, but the numbers for Brazil and Russia are positive which is better than they have had in recent years, though still not very strong.

"The challenge is whether the emerging market problems that we are seeing today in Turkey, Iran, Argentina, etc., are going to become a more generalised problem in the future"

Commodity exporting countries have also had quite a sharp downward revision in our forecast, and a more modest one for lower income countries.

We calculate how many emerging markets in developing countries are growing by less than advanced economies.

This gives us an indication of how many countries are falling behind the world economy as a whole.

Last year it was around 25 per cent of emerging market economies, but this year it is 40 per cent. So even though these headline numbers are not awful, they hide quite a large dispersion and a relatively large number of countries whose growth is substandard at this stage.

The dangers of a trade war

The possibility of trade war escalation is a definite short-term risk which has already seen some activity in US tariffs and retaliation from China.

Additional measures already announced may be implemented on Chinese products as well as automobile products from Europe.

If confidence is affected, this may have negative effect on the financial sector.

Though a trade war won’t have much more than a slight negative effect on world GDP, if different scenarios are stacked upon each other, it is possible there will be a very significant shock.

If five happen together, world GDP may drop by something like 0.8 per cent for a couple of years. While this wouldn’t tip the world into recession, it would still be a significant shock globally.

"Public indebtedness in many emerging economies now exceeds pre-crisis levels"

There is also a risk of tightened financial conditions exposing vulnerabilities and this is a particular risk factor for emerging markets.

The Federal Reserve (The Fed) has already been tightening interest rates and will continue to do so, but there is an extraordinary fiscal stimulus going on in the US, which may cause more inflation leading to further action from the Fed quicker than anticipated.

Meanwhile, public indebtedness in many emerging economies now exceeds pre-crisis levels, while private debt is growing in an environment of extraordinarily low interest rates.

As interest rates normalise, we may see some vulnerabilities exposed in some of those higher indebted emerging economies.

The Brexit effect

We did some research around six months ago looking at micro sectoral level economic analysis of all the Euro area states, minus the UK, how closely they are tied to the UK in trade terms and what the impacts of a World Trade Organisation scenario might be.

Think of it as a no deal Brexit, but without the financial crisis that might happen.

For the Euro area, it is very manageable, but for some individual countries, it could have quite a severe effect.

Ireland would be the worst hit, then those countries that are the most open and trade most significantly with the UK, such as the Netherlands, Denmark and Belgium.

Germany is in the middle of the pack, but if you go industry by industry you can see that the automotive sector and supply chain could be quite significantly affected.

"The interlinkage of those different risks might be what could really hurt the economy"

In terms of the effect on the UK, it is going to look much more like Ireland in terms of those negative effects over time.

There are some concerns about geopolitical constraints with the risk of populism on the right and left and how this might affect economic policy-making and performance.

The point to stress is that the interlinkage of those different risks might be what could really hurt the economy.

It isn’t just having one of these, but what happens if you have tighter financial conditions and a trade war or a no deal Brexit. If you put these factors together then the negative feedbacks could be quite significant.

Each one of these individually is not fatal to the world economy but some combination might well be.

"The US, UK and Europe as well as other parts of the world have seen a significant drop in productivity"

Over the next 5 to 20 years, one of the chief challenges for us within the financial world is how we avoid and deal with future crises.

The second challenge is low productivity growth since the last recession. The US, UK and Europe as well as other parts of the world have seen a significant drop in productivity.

Ultimately our economic performance is going to depend on dealing with this challenge.

Population ageing in advanced economies will cause labour force growth to come near to zero or in many cases to start shrinking and this presents considerable challenges for economic policy management.

There is also the challenge of rising inequalities, which have started to be addressed in most advanced economies and within many emerging market economies. This creates challenges from the political side but also in how you manage your economies.

Finally, there is the challenge of climate change.

This is part one in a series – to read part two, which looks at the risks facing financial institutions – click here.

This article is taken from the research report Insurance Asset Management, Europe 2019. To download the full report click here.