IMF Global Growth Downgrade Shows It’s Time for a New Approach

The International Monetary Fund (IMF) has downgraded global growth projections by 0.2% over the next two years. In a new report, the IMF says the global economy risks derailing unless it reforms to meet these challenges head on.

That may be so, but we need to rethink our obsession with growth. We must change our approach in how we look at, and value, growth as a whole. Instead of fixating on it, let’s better appreciate its limits. We must also understand that inflating growth is not in our best interests.

We’ll touch of these things in more detail later. For now, we’ll stay with the IMF’s forecasts.

Few of us need any reminders about the perils facing the world today. Anyone opening up a newspaper would see firsthand the threats facing the global economy.

At the centre of all this turmoil sits China. Without fail, analysts point the finger at China as the catalyst for the world’s problems. Of course, most of this criticism is unwarranted. China’s in a difficult position because it’s a victim of its own success.

China’s economy may be slowing, yet by global standards its flying. With annual growth of well over 6.5%, it remains a bright spot for the global economy. And yet we only focus on the fact that it’s slowing, which is a shame.

That’s just the hand they were dealt. The entire world rode on the back of two decades of Chinese growth. Now that China’s moving its economy away from low end manufacturing, growth is slowing. We should have expected this, but we’re moaning about it instead.

Slower growth rates were bound to happen. There are plenty of studies which prove that negative effects take place during economic shifts. By some estimates, transitions can take off as much as 1% off annual growth.

Joining China in the queue of problems putting pressure on global growth are commodities. China’s slowdown is only partly related to a fall in commodity prices. Yes, weak Chinese steel production has lowered demand for iron ore, that’s true. But China’s not accountable for plunging oil prices. Unlike iron ore, oil prices are affected by far more economies around the world.

Finally, we also have the ‘problem’ of rising interest rates in the US. Signs that the Federal Reserve is set to roll out rate hikes this year have spooked global markets. US interest rates are important as they affect how much credit is in the global financial system. The higher that rates go, the likelier it is that we’ll see capital flow out of emerging economies. And that spells bad news for growth in those countries.

Given all this, it’s no surprise the IMF has cut growth estimates by 0.2%. From developed to emerging nations, the IMF expects every kind of economy to struggle. It revised global growth for 2016 to 3.4%, down from 3.6% in October last year. For 2017, it revised forecasts down from 3.8% last year, to 3.6% today.

Looking at specific economies, the IMF expects the US to grow at 2.6% this year, down 0.2%. Projections for Europe aren’t much better, with growth expected to fall 0.1% to 1.7%.

Australia’s economy faces similar pressures. The Turnbull government is already facing budgetary pressures with a $40 billion deficit. In the midyear budget, the government revised down growth for 2015–16 by 0.25%. They now expect the economy to grow at an annualised rate of 2.5% in the year to June 2016.

What can be done to lift global growth?

According to the IMF report, developed economies would benefit from reforming labour markets. In particular, they should look to reforms that could encourage workforce participation. On top of which, they must address private debt, and find new avenues of growth.

All sound advice. That last suggestion in particular is one that’s often mentioned by economists. Find new avenues of growth. That’s easier said than done.

If it were that simple to find new sources of growth, we’d all be doing it. The problem is that opportunities for growth are in short supply. It’s not so much a lack of ideas as it is a shortage of opportunities. And that’s before we consider that there just may not be obvious answers to such problems.

But why are so fixated on growth anyway?

In truth, we have a morbid fascination with this concept. The entire world does. We believe that if something’s not growing, it’s not doing its job properly. And it better be growing fast, or else…

Our addiction to growth is unhealthy by any measure. We fear China’s slowdown because of what it means for the world. But we seem to forget that its economy is still flying. Who cares that the Chinese economy is still likely to grow by at least 6.5% this year, right? What good does that do if it’s down on last year? This mentality is prevalent, worrying, and dangerous.

Of course, that’s not to say that slowing growth doesn’t affect the global economy. It does, as Australia knows all too well. But we place so much emphasis on something that universal laws tells us is unsustainable. Things can’t grow forever, economies included. What goes up must come down, and GDP growth is no different in that respect. There is a limit to how far things can expand before they need to contract.

As you’ll know, we’re in one of those periods of contraction now. You could say that it all began in 2008. Yet the global economy never recovered from that financial crisis, because it wasn’t allowed to. At some point, it needs to be allowed to regenerate.

Instead of panicking about what this means for us, some perspective wouldn’t go astray. What if we thought of this decade as the downturn we had to have? The global economy needs to ready itself for its next cycle of growth. But it has to come back to ground before it can lift off again.

Enough with credit expansion already

The next obsession the global economy must get over is this fascination with credit expansion.

The average person on the street doesn’t have much say in what central banks do. And that’s because central banks are a law unto themselves. Monetary easing policies have created a mountain of debt in the global economy. They’ve helped delay the inevitable, but have made the next crisis much worse than it needed to be.

So how can we fix this? You won’t succeed in purging central banks. So the next best thing is to hope that they start reining in credit. Instead of fearing rising interest rates, why not embrace them?

I always use the analogy of an addict when it comes to interest rates. Think of an economy as an addict, and interest rates as their vice.

It’s true that an economy might be relatively stable if you keep feeding its addiction. And it’s also true that they might go off the rails if you take its vice away from it. But what’s better in the long run? Often times that unhinged comedown is necessary for an economy to make a full recovery. Just like an addict, you need to get to the core of the problem, rather than just addressing symptoms.

In the long run, we’re better off supporting higher interest rates. The US Federal Reserve made a start in December when it hiked rates by 0.25%. Now they need to run with it. There would be pain in the short term, no doubt. But it’d be necessary if we’re going to rebalance the global economy; a system that’s become addicted to cheap, easy capital.

Unfortunately, what we’re likely to see from policymakers is the opposite. Instead of higher interest rates, we’ll likely see even lower rates with a dollop of QE thrown in for good measure.

And it’ll be worse than that.

Instead of figuring out ways to keep money in people’s pockets to drive up spending, policymakers will tax us more. That’s what governments do when they run out of ideas.

Ultimately, the IMF is wrong. We don’t need to find new ways of achieving growth. We just need to stop thinking that growth is the be all and end all. We need to remove all the weeds in the global economy before it can start growing again.

Or, maybe we just need to accept that growth of 2% isn’t actually all that bad. Either or is fine.

Mat Spasic,

Junior Analyst, Markets and Money

PS: What we’re seeing playing out across global markets today is more than just a correction. Markets and Money’s Vern Gowdie says we’re at the beginning of the next crisis.

Vern is the Founder of the Gowdie Letter and Gowdie Family Wealth advisory services. As one of Australia’s top financial planners, Vern says the next crisis is already in motion.

He warns that stocks won’t be the only market that crashes when things blow up. There’s another multibillion dollar market that’s poised to collapse when the credit bubble pops.

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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