By Daniel Moss
DESPITE EVERYTHING that has been thrown at the global economy, it remains remarkably hardy. The Iran war is extracting a modest toll, higher interest rates don’t appear to have slowed growth so far, and AI is driving an investment boom.
But there are limits to the staying power of the growth for which the International Monetary Fund (IMF) updated forecasts this week. Luck — and reading the right signals from markets — will play a role.
The expansion isn’t flawless: The sharp climb in energy prices is causing hardship, extreme weather is forcing up commodity prices, and some policymakers worry about excess spending on technologies vital for data centers. Nor is it churlish to contemplate what comes next. Will the inevitable slowdown be mild, as occurred after the dot.com collapse in 2001, or deeper, like the period that followed the failure of Lehman Brothers Holdings, Inc. in 2008, or the shutdowns in response to COVID.
Central banks and fiscal authorities will again be called upon. Doing whatever it takes, however, to use the phrase deployed to great effect by former European Central Bank President Mario Draghi, might not be so simple.
Budgets in several advanced economies appear close to exhaustion, and bond markets are signaling their skepticism that politicians can put them on a sustainable path. France, for example, where students have taken to the streets and long-term rates have skyrocketed, would require a far bigger rescue than Portugal, Greece, or a moderately sized emerging market.
But for now, a reckoning is still a way off. Global growth will quicken to 3.4% in 2027, the IMF projected on Tuesday, up from an estimated 3.1% this year — itself a slightly better outcome than previously anticipated. The US and China will again be the standouts: America will do a bit better than forecast, and China will notch a 4% advance, unchanged from the prior forecast. France, the epicenter of a bond selloff in advanced economies, faces dimmer prospects.
The predictions, released at the fund’s annual meeting in Bangkok, aren’t so much cause for celebration as a recognition that the worst hasn’t come to pass. Twelve months ago, the world was still digesting steep US tariffs and traders were wringing their hands over the future of the dollar. But the “Sell America” narrative fizzled and Washington’s other own goal, the jump in oil that followed its attack on Iran, hasn’t shredded the outlook.
Contemporary hurdles might be better understood in perspective. It takes a lot to knock growth out of the 3% vicinity. The pandemic led to a decline in world gross domestic product of 2.7%, and the subprime meltdown pushed output slightly into negative territory.
Today’s nominally solid scenario depends on policymakers not making any major mistakes. For now, they are saying and doing the right things. The Federal Reserve is likely to hike rates again after nudging them up last month, and the ECB, and central banks in India and Australia made similarly hawkish noises. In many instances, inflation remains higher than targets.
What happens the next time the economy gets into a really serious scrape? Who rides to the rescue — and will it be as effective as during earlier slumps? It will, ultimately, be left to central banks because governments, which control fiscal policy, are on treacherous ground. The capacity of national treasuries to borrow at competitive rates has been diminished by soaring bond yields.
That could be a blessing in disguise, according to Singapore President Tharman Shanmugaratnam, who was finance minister during the Global Financial Crisis of 2007-2009, and led the central bank before entering politics. The fixed-income upheaval provides leaders with an opportunity to put their house in order because budget compromises are often reached when dire consequences loom. It’s vital this chance be seized, he said on a panel with IMF chief Kristalina Georgieva at the city-state’s national university last week. Georgieva borrowed from rock legends Led Zeppelin, likening mounting debt to a “stairwell”— just not to heaven.
While we might not be in hell, rarely has a pretty good outlook for the global economy come with so many qualifiers. They may be more consequential than the baseline forecasts. The last time the IMF held its showcase in Thailand, in 1991, the kingdom and its neighbors were on the cusp of years of runaway growth. The Soviet Union had collapsed; globalization and prosperity were the buzzwords. Few saw the currency crisis and deep recession that would envelop Asia before the decade was out. The spark was Bangkok’s decision to abandon efforts to prop up the baht.
Thailand’s own economy is traveling reasonably these days. Yet, like the global one, it isn’t amazing.
BLOOMBERG OPINION