March 15, 2018
When the Group of Twenty finance ministers and central bank governors met last October, there was a sense of optimism about the global economic upswing and the opportunities for much-needed reforms.
When they meet again in Buenos Aires next week, their focus will be on the policies needed to protect this upswing against downside risks and bolster growth going forward.
The good news is that the growth momentum has continued to strengthen, involving three- quarters of the world economy.
But even though the sun still shines in the global economy, there are more clouds on the horizon. Think of the growing concerns over trade tensions, the recent spike in volatility in financial markets, and more uncertain geopolitics.
Moreover, the pick-up expected for 2018 and 2019 will eventually slow, which implies a challenging medium-term outlook for many countries, especially in advanced economies.
That is why countries need to implement policies to guard against downside risks, strengthen resilience, and foster medium-term growth that benefits everyone. Now is the time to take bold policy actions, and make the most of this period of global growth.
The IMF in January upgraded its global GDP forecast to 3.9 percent for both 2018 and 2019.
What’s behind the momentum? Mostly cyclical forces: global growth has been driven by remarkably strong investment and trade, while money and credit are still flowing easily within and across countries.
This year and next, advanced economies are expected to see growth exceeding their still weak medium-term potential. Growth in emerging and developing countries is projected to firm further in the short term, helped by a modest improvement in prospects in commodity exporters.
So yes, the current global momentum remains strong. And yes, there are concrete steps we should take to ensure that it stays strong.
Let me highlight 5 priorities:
1. Steer clear of protectionism
Policymakers need to work constructively together to reduce trade barriers and resolve trade disagreements without resort to exceptional measures. They should ensure that the recently announced U.S. import tariffs do not lead to a wider escalation of protectionist measures . Economic history clearly shows that trade wars not only hurt global growth, but they are also unwinnable.
We know that the self-inflicted harm of import tariffs can be substantial even when trade partners do not retaliate with tariffs of their own.
We also know that protectionism is pernicious, because it puts the biggest strain on the poorest consumers who buy relatively more low-priced imports. In other words, harming trade is bad for the economy and bad for people.
Moreover, the way to address global economic imbalances is not to raise new obstacles to trade. Using fiscal means to address global imbalances is critical. This includes, for example, lowering deficits in the U.S. to bring public debt towards a sustainable path, and stronger infrastructure investment and education spending in Germany.
And importantly, those who are adversely affected by globalization and technological progress should receive more support to ensure that they can invest in their skills and transition to higher-quality jobs.
2. Guard Against Financial Risks
Guarding against downside risks also requires addressing the buildup of debt in the public and private sectors, following a long period of easy financial conditions.
Government debt levels in advanced G20 economies have on average reached 114 percent. Globally, debt levels of sovereigns, companies, and households are at an all-time high.
This creates financial vulnerabilities. Consider a scenario that includes an unexpected surge in inflation and a sudden tightening of global financial conditions. These changes could prompt financial market corrections, worries over debt sustainability, and capital flow reversals in emerging markets.
To mitigate these risks, countries should take advantage of the current momentum by building fiscal buffers—creating more room to act in the next downturn—and by making active use of macro- and microprudential policies. In emerging economies, flexible exchange rates can help mitigate external shocks.
3. Step Up Economic Reforms
Even as they work to protect the current upswing, policymakers also need to foster medium-term growth that is stronger and more widely shared.
Boosting growth is especially important for advanced G20 nations. Last year, their GDP was on average about 15 percent below the pre-2008-crisis trend line, while their emerging market peers remained close to it.
In other words, these advanced economies need a sustained increase in growth well beyond the current upswing.
To lift productivity and potential growth, countries can reenergize reforms, especially in labor markets.
For example, G20 nations have pledged to reduce the gap in labor force participation rates between men and women by 25 percent by the year 2025, which could create an estimated 100 million new jobs. To achieve this target, some countries will need to significantly scale up their efforts, while others—such as Australia, Brazil, Germany, Japan, and the United Kingdom—have already made good progress.
These and other major reforms are more potent and easier to implement when economies are healthier. In other words, the time is now.
4. Foster More Inclusive Growth
If growth is to become more sustainable, it must be more inclusive. A key priority is to shape the future of work in ways that benefit all citizens.
For example, a recent Canadian initiative showed that on-the-job skills training can be more effective than classroom learning.
Reducing the skills gap is more important than ever, because the digital revolution is transforming workplaces and industries. McKinsey estimates that 375 million workers, or 14 percent of the global workforce, may be at risk of job losses by 2030.
Nobody knows exactly how this future will unfold, but it seems safe to say that we will need policy action.
For example, new IMF analysis shows that the gains from technological innovation can be widely shared by adjusting taxes and benefits and increasing public spending on education and training.
5. Strengthen International Cooperation
Working together is critical to secure strong, sustainable, balanced, and inclusive global growth. From trade, to tax competition, to climate change, to fighting money laundering and the financing of terrorism. There is no shortage of areas where we need more international cooperation, not less. Let me highlight two issues:
We need to work together to help address increasing debt vulnerabilities in low-income countries. Public debt levels for the median country increased to 47 percent last year, up from 33 percent in 2013. Countries facing external debt burdens need to move promptly to contain further debt accumulation and need to rely more on generating domestic revenue to meet development financing needs. Bilateral official creditors should develop plans for participating in debt restructuring operations where needed, and share information with other creditors.
There is also room to develop international regulatory principles for crypto assets including initial coin offerings (ICOs). The goal should be to harness the potential of the underlying technology, while ensuring financial stability and mitigating the risks from money laundering and terrorism financing.
The G20 can show leadership on all these issues. In the process, they can also secure the upswing and promote growth that is shared by everyone.