The world economy is going through a delicate moment

26 July 2019
INCAE Executive Education

A year ago, economic activity was accelerating in almost every region of the world, but much has changed since then. There is an escalation of trade tensions between the United States and China, credit restrictions in China, macroeconomic tensions in Argentina and Turkey and the upheavals in the automotive industry in Germany, but also a contraction of financial conditions together with the normalization of monetary policy of the large advanced economies that have weakened global expansion since the second half of 2018.

It is projected a growth contraction in 2019 for 70% of the world economy. Global growth decreased to 3,6% in 2018 and would continue that trajectory to stand at 3,3% this year. 

The downward revision of growth, of 0,2 percentage points for 2019 compared to the projection for January, is also generalized. It reflects negative revisions from several large economies, such as the euro area, Latin America, the United States, the United Kingdom, Canada, and Australia.

Although this year started with a weak step, a rebound is expected for the second half of the year until causing world economic growth to be 3,6% in 2020, But this recovery is precarious and depends on a rebound in emerging market and developing economies, whose growth is expected to increase from 4,4% in 2019 to 4,8% in 2020. 

Specifically, is based on the expected revival of growth in Argentina and Turkey and some improvement in the situation in another group of developing economies that are under stress and consequently subject to considerable uncertainty.

Although the world economy continues to expand at a reasonable rate and baseline projections do not contemplate a global recession, there are numerous downside risks. The tensions to which international trade policy is subjected could flare up again and have repercussions in other areas, such as the automotive industry, producing serious disruptions in international supply chains.

In systemically important economies such as the euro area and China, growth could surprise to the downside; for his part, Brexit risks remain acute. A drop in market sentiment could quickly tighten financing conditions in an environment marked by heavy public and private sector indebtedness in many countries.

Given these risks, it is imperative to avoid costly policy mistakes. Authorities must cooperate to prevent the uncertainty surrounding policy from chilling investment. Fiscal policy will need to find a balance between supporting demand, protecting social spending, and keeping public debt on a sustainable path, although the optimal combination of these measures will depend on the circumstances of each country. 

In all economies, it is imperative to take steps to stimulate potential output, improve inclusivity, and build resilience. It is necessary to strengthen multilateral cooperation to resolve trade disputes, tackling climate change and cybersecurity risks.

The world economy is going through a delicate moment. If any of the serious downside risks materialize, the expected recovery in stressed, export-dependent and heavily indebted economies may be derailed. In that case, the authorities will have to make adjustments. Under the circumstances, synchronized but country-specific fiscal stimulus policies may be necessary, complemented by actions by central banks on the money supply to boost the economy.

Excerpt from the article by Gita Gopinath, Chief Economist of the International Monetary Fund, published in the magazine of the World Economic Forum

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