Will there be a global recession? What next for policy? Where are the major financial risks? These questions will be to the forefront of minds this week in Washington as the annual meetings of the International Monetary Fund (IMF) and World Bank take place.
Policymakers from across the globe will be in attendance, plus over 10,000 participants from the financial sector, hosting countless bilateral meetings and events. “What’s the mood?” is usually the key question as the week unfolds.
It will begin with the IMF unveiling its latest thinking on the global economy. Unsurprisingly, it will be pessimistic. Over the last year the IMF has been trimming its forecasts. In July they predicted growth of 3.2 per cent this year and 3.5 per cent next.
More of global growth is coming from emerging economies, led by China. This has suffered under the huge hit of the trade dispute.
The new IMF managing director, economist Kristalina Georgieva, is expected to talk of a synchronised global downturn. Thus it would not be a surprise if the IMF cuts its global growth forecast to three per cent or less for this year and to 3.2 per cent next year.
Crucially, to put this in perspective, this is nothing like the Great Recession when zero “growth” was recorded in 2009 on the IMF measure. Even so, three per cent or less is weak by recent standards and would be the lowest since then.
The important message likely to be conveyed is that, following the slowdown over the last year, a global recession can be avoided through a proactive policy response. The best solution would be a resolution of the trade dispute. But monetary and fiscal stimulus will be necessary, too.
Monetary policy has been the shock absorber for the world economy. Despite low rates, it would be premature to assume that active monetary policy has run its course. Just look at Japan’s experience.
Last week saw the Bank for International Settlements (BIS) release a detailed report from a working group of central bankers. It took a positive view of the unconventional monetary policies used over the last decade. It did, however, state, “their effectiveness is significantly enhanced when deployed in the context of a strategy that encompasses other areas of public policy”.
In a nutshell, monetary policy plays a vital role, but now, increasingly, fiscal policy is under the spotlight. Although debt levels are high, negative yields mean many governments are being paid to borrow. It would not be a surprise if a host of speeches in Washington highlighted this increased fiscal space.
The most significant change at these gatherings in recent years has been a shift among financial sector participants from a focus on regulatory policy to the threats and opportunities from the new economy.
Cyber resilience has figured prominently, but so too this year will the world of data, artificial intelligence and the future of money. Investing in fintech and preparing for continuous change is one important message, reflected in London’s ongoing success.
The IMF’s Georgieva has even talked of trade wars leading to a “digital Berlin Wall” as countries choose different technology systems. That all seems far too pessimistic. The climate agenda, meanwhile, merits a higher profile.
A big concern in Washington will be where are the financial risks? Anyone who attended these meetings during the crisis will not need to be reminded of the fear then that was in the air.
In the financial crisis the epicentre was banks in the west. Now, largely because of tough capital constraints, this core of the financial system is seen as safe.
Of course, inter-connectedness means contagion risks can never be dismissed, wherever the initial problems. With exceptionally low interest rates globally, markets are not pricing properly for risk. This is a cause for concern, as too for some will be the low level of bond yields.
One worry that has been highlighted is global liquidity. Largely because of the printing of money by central banks, global liquidity is ample. The trouble is there is no global lender of last resort in the event of a crisis. There may be calls this week to address that.
In 2011, the Landau Report was released by the BIS on this topic. It identified the danger of pro-cyclicality of private liquidity. Since then, increased global borrowing by private firms has led to maturity and currency mismatches, with much borrowing in dollars and euros. This is seen as a potential source of financial instability. Emerging economies appear more exposed.
Finally, these gatherings provide finance ministers and central bank governors a wonderful stage to get their message across to the global financial community. For Britain, we need to ensure that the message conveyed is that Brexit is a great opportunity and that the City of London is well placed to seize it.
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