November 28, 2018
As G20 leaders gather in Argentina, the global economy faces a critical juncture. We have had a good stretch of solid growth by historical standards, but now we are facing a period where significant risks are materializing and darker clouds are looming.
As the most recent economic data have been disappointing, we must not allow ourselves to be held back. Rather, we must be ambitious, including by implementing a multilayered set of reforms which could potentially add an additional 4 percent boost to the GDP of the G20 countries.
Success here depends on us acting swiftly—and acting together.
Signs of moderating growth
The IMF’s World Economic Outlook, published in October, forecast global growth of 3.7 percent for 2018 and 2019. These estimates were 0.2 percentage points below our July estimates—a downgrade due largely to rising external and financial pressures on emerging markets and a tangible increase in trade tensions.
Implementing a multilayered set of reforms could potentially add a 4 percent boost to the GDP of the G20 countries.
Recent data suggest that these headwinds could have slowed momentum even more than we had expected. For example, third-quarter growth has been surprisingly low in emerging market economies such as China, and in the euro area. A no-deal Brexit could further dent confidence.
Over the medium term, particularly in advanced economies, we see growth moderating because of adverse demographics and slow productivity. This includes the United States, once the recent fiscal stimulus ends.
In addition, in too many countries, excessive inequality is hurting many people—and it also risks undermining public support for reforms that would enhance productivity.
What can be done to address these challenges? Let me highlight three priorities.
First, strengthen our defenses
Policymakers can start by creating more fiscal room for maneuver, so that they have the resources needed to increase support to the economy should growth weaken significantly. This implies undertaking meaningful fiscal consolidation now—especially in high-debt countries such as Italy and in several emerging economies.
In terms of monetary policy, the ongoing process of normalization of interest rates in many advanced economies should continue to follow a gradual, well-communicated, and data-dependent path. This is not only in their own interest, but also helps to avoid unnecessary turbulence for others.
The good news is that monetary policy normalization indicates relatively strong growth in the advanced economies. In recent months, however, monetary tightening—combined with rising trade tensions—has heightened external pressures for some emerging economies. How can they respond?
Those with well-anchored inflation targets should rely on exchange rate flexibility to mitigate external pressures. Where these pressures threaten to be disruptive, capital flow management measures could also play a role as part of a broader policy package.
Second, teamwork is the winning tactic
We know that rising trade barriers are ultimately self-defeating for all involved. Thus, it is imperative that all countries steer clear of new trade barriers, while reversing recent tariffs.
We have a unique opportunity to improve the global trade system. IMF research suggests that liberalizing trade in services could add about ½ percent, or $350 billion, to G20 GDP in the long run.
At the same time, concerted actions by individual countries can strengthen their own economies, reduce global imbalances, and boost the global economy. Some examples: Germany could use its fiscal space to strengthen its growth potential, by increasing investment and incentivizing labor force participation; the US could help by lowering its fiscal deficit; and China could help by pressing ahead with its economic rebalancing.
After a decade of relatively easy financial conditions, many countries also need to address record levels of debt—altogether $182 trillion globally by IMF estimates. In addition, increasing the transparency of the scale and terms of borrowing, especially in low-income countries, is an imperative.
More broadly, financial sector risks require action, including by avoiding a rollback of post-crisis advances in financial sector regulation.
Third, pick up the pace
The theme of Argentina’s G20 presidency—Building Consensus for Fair and Sustainable Development—is a critical priority. Yet at present, progress is too slow. How can it be accelerated?
Most G20 advanced economies could benefit from relaxing product market restrictions to spur innovation and lower prices. Easing access to professional services would be especially important, for example in Japan and many euro area countries. Increasing support for research would be vital in Canada, Germany, and the United Kingdom, among others.
Most G20 emerging market countries, too, would benefit from product and labor market reforms. Economies such as Brazil, China, India, and Russia would gain by moving away from distortionary taxes.
And virtually everywhere, raising women’s participation in the workforce would not only boost growth, but also help to make societies fairer and more inclusive.
These are just some of the measures which, if jointly implemented, could by our calculations increase G20 GDP by 4 percent.
During the ten years since the first G20 Leaders’ Summit, the G20’s efforts have been crucial in helping the global economy recover.
Yet darker clouds are now returning to the horizon.
Tackling this challenge means implementing policies that make sense both nationally and internationally. It also means strengthening the global financial safety net, with a well-equipped and well-resourced IMF at its center, to ensure that we can play our role in helping countries prevent and deal with future crises.
As the G20 meets in Buenos Aires, let us act swiftly and act together.