At the spring meetings of the IMF and World Bank, the fund’s economic forecasts were carefully calibrated to place the institution in its traditional sweet spot. It was reluctant to point to genuine signs of improving global economic performance because that would look complacent. Equally, it could not predict the world was about to enter a financial crisis for fear of a self-fulfilling prophecy. So, it chose to warn of hard-landing risks — especially if inflation was not properly controlled.
More compelling than this assessment of current conditions was the IMF analysis of its long-term forecasts over the past 15 years. These show a dire trend. Instead of thinking the world could sustain a growth rate of almost 5 per cent a year, which it believed in 2008, the fund now reckons the sustainable rate is only 3 per cent.
In the 30 twice-yearly forecasts it has produced since April 2008, the IMF has revised down the long-term outlook almost every time. Pierre-Olivier Gourinchas, IMF chief economist, says now that the slowdown was “predictable”. Perhaps so, but it was not predicted by the IMF.
The truth is that this persistent slowing of medium-term global growth prospects was not at all easy to forecast. As China, India and other significant emerging economies became a larger part of the global economy, their dynamic performance pulled global medium-term growth rates higher. Emerging economies represented 37 per cent of global output in 1990 compared with 59 per cent now. This was the dominant global force until 2008.
But that has had to be balanced with the tendency of these countries’ annual growth rates to slow as they became richer. Each new rail or road link, for example, represented a smaller boost to their economies and growth rates.
What the IMF and most other forecasters repeatedly got wrong was that the domestic slowing of emerging economies has been much more powerful since 2008 than their still rapid relative growth rates and ever greater weight in the world economy.
More worrying still is that the slowing growth story is not really one of convergence with the richest countries at all. It is much more accurate to say that over the past 15 years, medium-term growth prospects have slowed everywhere — in the US and other advanced economies, in China, in other large emerging economies and in poor countries. The only notable exception is India.
Some of this deterioration is the inevitable effect of slower population growth and ageing societies. But that is not the whole story; much of it comes from countries prioritising short-term resilience over efficiency and dynamism.
The pandemic taught companies and governments the importance of resilient supply chains. Putting eggs in many baskets is safer, but has a cost. The two largest economies, China and the US, view each other as strategic rivals and prioritise resilience and security over trade and integration. Although politicians talk about jobs created at home, when trade goes down, the cost of trade barriers outweighs the benefits.
In terms of domestic politics, resilience when defined as political stability can mean avoiding difficult and unpopular but necessary reforms. Only the braver politicians, such as Emmanuel Macron, try to implement changes as unpopular as France’s decision to raise the retirement age.
The question is whether the balance is right. Too often, resilience is presented as a benefit without costs. But a constant weakening in global economic growth rates will hamper the transition to net zero and the fight against global poverty; it will raise geopolitical tensions and leave many populations extremely dissatisfied.
There is a place for resilience in policymaking. But we need to understand the costs. As the IMF has shown this week, they are high.