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Global economic growth hits record low since 2008/09 recession

Publishing Date : 21 October, 2019

Author : AUBREY LUTE

The International Monetary Fund, a global economic think tank based in Washington, United States has projected global economic growth at 3.0 percent for 2019, its slowest pace since the 2008/09 global financial crisis. This according to the World Economic Outlook report released by IMF on Tuesday is a serious climb-down from 3.8 percent in 2017, when the world was in a synchronized upswing.


The subdued growth is attributed to rising trade barriers; elevated uncertainty surrounding trade and geopolitics; idiosyncratic factors causing macroeconomic strain in several emerging market economies; and structural factors, such as low productivity growth and aging demographics in advanced economies. Global growth in 2020 is projected to improve modestly to 3.4 percent, a downward revision of 0.2 percent from the IMF April projection. However the World Economic Outlook states that unlike the synchronized slowdown, this recovery is not broad based and is said to be precarious. Growth for advanced economies is projected to slow to 1.7 percent in 2019 and 2020, while emerging market and developing economies are projected to experience a growth pickup from 3.9 percent in 2019 to 4.6 percent in 2020.


About half of this is driven by recoveries or shallower recessions in stressed emerging markets, such as Turkey, Argentina, and Iran, and the rest by recoveries in countries where growth slowed significantly in 2019 relative to 2018, such as Brazil, Mexico, India, Russia, and Saudi Arabia. A notable feature of the sluggish growth in 2019 is the sharp and geographically broad-based slowdown in manufacturing and global trade.


In depth the IMF says factors driving this are higher tariffs and prolonged uncertainty surrounding trade policy which has dented investment and demand for heavily traded capital goods. The automobile industry is contracting owing also to idiosyncratic shocks, such as disruptions from new emission standards in the euro area and China that have had durable effects.


Consequently, trade volume growth in the first half of 2019 is at 1 percent, the weakest level since 2012. In contrast to weak manufacturing and trade, the services sector across much of the globe continues to hold up; this has kept labor markets buoyant and wage growth healthy in advanced economies.
International Monetary Fund Economist, Gita Gopinath observed in the report that the world economy has been slowing sharply in the last three quarters of 2018 with the pace of global economic activity remaining weak. “Momentum in manufacturing activity, in particular, has weakened substantially, to levels not seen since the global financial crisis,” he said.


Gopinath further notes that rising trade and geopolitical tensions have increased uncertainty about the future of the global trading system and international cooperation more generally, taking a toll on business confidence, investment decisions, and global trade. “A notable shift towards increased monetary policy accommodation through both action and communication has cushioned the impact of these tensions on financial market sentiment and activity, while a generally resilient service sector has supported employment growth, the outlook in the entirety remains precarious,” he said.


The IMF says a projected slowdown in China and the United States, and prominent downside risks, a much more subdued pace of global activity could well materialize, recommending that to forestall such an outcome, policies should decisively aim at defusing trade tensions, reinvigorating multilateral cooperation, and providing timely support to economic activity where needed. “To strengthen resilience, policymakers should address financial vulnerabilities that pose risks to growth in the medium term. Making growth more inclusive, which is essential for securing better economic prospects for all, should remain an overarching goal” advices the US based think tank.


Over the past year, global growth has fallen sharply. Among advanced economies, the weakening has been broad based, affecting major economies, the United States and especially the euro area and smaller Asian advanced economies. The slowdown in activity has been even more pronounced across emerging market and developing economies, including Brazil, China, India, Mexico, and Russia, as well as a few economies suffering macroeconomic and financial stress.  Furthermore the IMF analyses that regional disparities in real output, employment, and productivity in advanced economies have attracted greater interest in recent years against a backdrop of growing social and political tensions.


Regional disparities in the average advanced economy have risen since the late 1980s, reflecting gains from economic concentration in some regions and relative stagnation in others. On average, lagging regions have worse health outcomes, lower labor productivity, and greater employment shares in agriculture and industry sectors than other within country regions. Moreover, adjustment in lagging regions is slower, with adverse shocks having longer lived negative effects on economic performance.


Trade shocks in particular greater import competition in external markets do not appear to drive the differences in labor market performance between lagging and other regions, on average. By contrast, technology shocks proxied by declines in the costs of machinery and equipment capital goods, raise unemployment in regions that are more vulnerable to automation, with more exposed lagging regions particularly hurt.


In recommendation IMF says National policies that reduce distortions and encourage more flexible and open markets, while providing a robust social safety net, can facilitate regional adjustment to adverse shocks, dampening rises in unemployment. “Place based policies targeted at lagging regions may also play a role, but they must be carefully calibrated to ensure they help rather than hinder beneficial adjustment,” advices the World Economic Outlook.


On the reforms fronts the IMF says, the pace of structural reforms in emerging market and developing economies was strong during the 1990s, but it has slowed since the early 2000s. The Washington headquartered economic think  tank says a reform push in such areas as governance, domestic and external finance, trade, and labor and product markets could deliver sizable output gains in the medium term.


The World Economic Outlook posts that a major and comprehensive reform package might double the speed of convergence of the average emerging market and developing economy to the living standards of advanced economies, raising annual GDP growth by about 1 percentage point for some time. “At the same time, reforms take several years to deliver, and some of them easing job protection regulation and liberalizing domestic finance may entail greater short-term costs when carried out in bad times; these are best implemented under favorable economic conditions and early in authorities’ electoral mandate.”


The outlook also observes that reform gains also tend to be larger when governance and access to credit two binding constraints on growth are strong, and where labor market informality is higher because reforms help reduce it. “These findings underscore the importance of carefully tailoring reforms to country circumstances to maximize their benefits,” it says.

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