It is now 10 years since the global economy was convulsed by the most serious crisis since the 1930s, and there is a sense of deja vu as finance ministers and central bank governors gather in Washington for this week’s spring meeting of the International Monetary Fund. As was the case before 2008, growth looks brittle. Debt levels in the west, according to the IMF’s latest fiscal monitor, have not been higher than they are today since the second world war. In emerging markets, they are at levels typically associated with the sort of problems that befell Latin America in the 1980s.
In another echo of a decade ago, the US is once again becoming the global consumer of last resort. The generalised upswing in the global economy is in no small part due to the world’s biggest economy sucking in imports. Global imbalances between countries running surpluses and those running deficits – a warning sign of trouble ahead in the mid-2000s – are back. Donald Trump’s fiscal policy is certain to make the global imbalances worse. The IMF thinks the extra demand stimulated by the president’s package of tax cuts and extra spending will suck in imports and boost an already high US current account deficit by $150bn in 2019.
In some respects, though, the world today is more troubled than it was in 2008. For a start, in Mr Trump the US has a president willing to risk a trade war to force creditor nations such as China and Germany to reduce the size of their current account surpluses. What’s more, the public in the west now has a much more jaundiced view of globalisation in general and free trade in particular following a decade of flatlining wages and stagnant living standards. Mr Trump’s “America first” message has struck a chord with many American voters just as “take back control” resonated with many UK voters during the EU referendum.
The IMF says the broad-based momentum in the global economy is unlikely to last and that within the next couple of years growth will slow down from 3.9% to 3.7%. It is not hard to envisage something a lot worse than that. A global economy awash with debts denominated in US dollars looks vulnerable to a sharper-than-expected increase in American interest rates from the Federal Reserve triggered by rising inflation. It is not immediately obvious that policy in the US needs to be tightened aggressively. Inflation is low and the employment rate for prime-aged workers between 25 and 54 is still below its pre-recession level.
But the chances are that the Fed will start to get trigger-happy, not least because Mr Trump has no intention of heeding the IMF’s advice that he should be reducing the US budget deficit rather than increasing it through ill-timed tax cuts. Relations between the White House and the IMF are currently worse than they have been since Franklin Roosevelt’s officials shaped the new multilateral economic institutions in the latter days of the second world war. Indeed, the prospect is that Mr Trump will become still more protectionist as the US current account widens over the coming months. The risks of a trade war are very real.
Three things would help avert trouble. Firstly, surplus countries could defuse trade tensions with pro-growth policies that lead to higher imports. Secondly, central banks should err on the side of caution when it comes to raising interest rates. Finally, as the IMF notes, growth should be made more inclusive. Given the Fund’s own role in putting together anti-poor rescue plans for countries such as Greece, that’s a lesson it needs to learn itself.