I have been to Bali twice. Once was on honeymoon. The other time was to give a keynote speech at the Asian Development Bank annual meeting that was taking place there. It is far better suited to holidays and romance than finance and banking.
I thus found it strange that it was the location chosen for this year’s annual meetings of the International Monetary Fund (IMF) and World Bank. Every third year these meetings are held outside their normal home in Washington. These meetings are just about to occur and alongside Finance Ministers and Central Bank Governors, there will be thousands of attendees from the global banking and finance industry. While they will no doubt have many key issues to address, one has to question this choice of venue.
Occurring a decade after the global financial crisis that almost brought the world economy to its knees, what is the message that is being sent? Particularly when a decade later, the legacy of that crisis is still evident, with high levels of debt, strains on public finances and sluggish wage growth.
The banking sector is more resilient, but asset markets look vulnerable
The proximity of these meetings to the recent horrific tsunami and its aftermath elsewhere in Indonesia is notable. While the cause of that was nature, the fact that the early warning tsunami system did not work properly – due, it seems to a combination of factors including lack of money and theft – highlights how much still needs to be done on the ground across many countries. Many of the attendees in Bali will be only too well aware of that.
When it comes to finance, the last decade has seen much progress on ensuring the banking sector is more resilient and better prepared to prevent another crisis and to be able to cope if one were to occur. That is good.
Yet, as we are seeing this week, asset markets across the globe look vulnerable. Stock markets are volatile as the global selloff has shown. Bond yields, low for so long, are under upward pressure, which could threaten higher borrowing rates across western economies, including our own.
The last decade has seen monetary policy act as the shock absorber. But now, led by the USA, the period of low rates and the printing of money is being reversed. The UK, euro area and Japan will have to move at a far slower speed and scale than the Americans. But for all, the issue is the same. How resilient will their economies be and financial markets be to policy nominalisation? Yet if they don’t act, will inflation edge higher and shock us all?
The IMF cut global growth forecasts, but they are still strong
On the eve of these meetings, the IMF has released its latest economic update. The IMF’s forecasts may not always be correct but they merit attention both for their analysis and as a barometer of where the consensus is on global growth.
While they cut their forecasts for global growth from 3.9% to 3.7% for this year and next, these are still very strong numbers. This is the same growth as last year, but above the 3.3% of 2016. Anything close to 3% is incredibly weak; while 4% and above was witnessed just ahead of the financial crisis and proved unsustainable.
How prolonged the present growth phase can be is at the heart of the present worries. Moreover, could there be a repeat of previous problems in the financial sector or will there be new concerns, as we are seeing now with the escalating trade war between the two biggest economies, US and China?
What is the message from emerging markets?
Across emerging economies, the driver of global growth post crisis, higher US rates and a firm dollar are taking their toll. One issue in Bali will be what message will the emerging economies send. China is easing policy, India is letting its currency weaken while others, like Indonesia – the hosts – are raising rates. The message is that one size does not fit all but overall, growth is steady.
But the real issue for all the participants is not just about where growth will be this year and next, but whether enough has been done over the last decade to improve the supply side of their economies to ensure they can grow stronger for longer. This means many things, too, including investment, innovation and better policy making. In the past this used to be called a dash for growth. Now it is more like a marathon, requiring much continuous effort. The IMF’s eve of conference message was that, “large challenges loom for the global economy to prevent a second Great Depression”.
That may be far too pessimistic. There are many positives: record employment here; more people out of poverty across the globe. These are examples not to ignored.
Yet the economic paradox is this: the global financial crisis of 2008 was caused by low rates, ample liquidity and too much debt. The solution to it has been lower rates, more liquidity and increased debt. Perhaps, after all, meeting in Bali is the right signal for the IMF and the leaders of global finance to send. Because the question is, has anything really changed?
Please remember that when investing your capital is at risk.