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Spring in global economy’s step post political woes

Brexit and Mr Donald Trump were supposed to bring doom, gloom and trade wars to the global economy, if not famine and populism-fuelled pestilence. But time heals many a prediction. And so, instead, last week’s spring meetings of the world’s finance chiefs in Washington have been brimming with an optimism worthy of the season.

IMF managing director Christine Lagarde and United States Treasury Secretary Steven Mnuchin discussing the American economy at the World Bank/IMF Spring Meetings in Washington on Saturday. Photo: AP

IMF managing director Christine Lagarde and United States Treasury Secretary Steven Mnuchin discussing the American economy at the World Bank/IMF Spring Meetings in Washington on Saturday. Photo: AP

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Brexit and Mr Donald Trump were supposed to bring doom, gloom and trade wars to the global economy, if not famine and populism-fuelled pestilence. But time heals many a prediction. And so, instead, last week’s spring meetings of the world’s finance chiefs in Washington have been brimming with an optimism worthy of the season.

“Spring is in the air and spring is in the economy as well,” said Ms Christine Lagarde, managing director of the International Monetary Fund (IMF), as she opened the meetings on Thursday.

The IMF’s confidence is fuelled by improving performance in most of the major world economies. The fund has raised its forecast for global growth for the first time in six years based on a stronger China, which this week said its economy grew at an annual rate of 6.9 per cent in the first quarter, and improving economies in Japan and Europe.

The US is approaching — if not at — full employment.

For the IMF, which is predicting 3.5 per cent global growth in gross domestic product this year, the stronger outlook is the fruit of broad-based recoveries in manufacturing and trade.

“What is different this time is that all the engines are firing for the first time,” said Mr Raghuram Rajan, a former Indian central bank governor and IMF chief economist.

“They are not firing very strongly. But they are firing.”

“The strengthening of the recovery is for real,” said another former IMF chief economist, Mr Olivier Blanchard, who argues that the legacies of the 2008 crisis and the adjustment to a more “mediocre” low-growth future are at an end.

In short, while politics in much of the Western world is being overwhelmed by the built-up angst from a decade of low growth, the global economy is at its most robust since the financial crisis.

Which means, of course, that if the pattern of the post-crisis years holds it could all go horribly wrong, and quickly. The early looming threat is the French presidential election, where opinion polls have made even the IMF nervous. Were the far-right leader Marine Le Pen to win the two-round election and deliver on her promises to exit the euro and the European Union “it would certainly entail major disorder”, the normally wary Ms Lagarde told a television interviewer.

CHINESE STEEL PRODUCTION

The potential risks also still loom large just down Pennsylvania Avenue from the IMF at the White House. Even as Ms Lagarde was praising the new US administration, Mr Trump was launching a national security investigation into steel imports, which appears likely to lead to new tariffs and what would be his first act of significant protectionism.

It could trigger retaliation from China and the EU. Although Mr Trump has given some signals economic nationalism is fading as a force in his administration, his instincts on trade and immigration still appear distinctly protectionist.

Just beneath the immediate optimism about the global economy, the existential questions about what the Trump administration and the broader wave of populism might mean for institutions such as the IMF and the World Bank have been much debated.

Mr James Boughton, who until 2012 was the IMF’s official historian, argues that not since former president Richard Nixon lobbed rhetorical cannonballs at the IMF in the 1970s has it been under so much assault from the US. Yet he says the current crisis is even more profound.

“At a very deep level we are at a moment ... where the crisis of leadership is greater than it has been at any time, certainly in the lifetime of the IMF,” he said. “There are very good reasons to be optimistic about the (global) economy over the next 18 months. (But) the incoming administration in the US does not seem to have any appetite for exercising leadership in the world economy and in the international system. That is something that is new and dangerous.”

Mr Steven Mnuchin, Mr Trump’s Treasury Secretary, disputes that assessment. “We’ve been a huge part of the IMF since its creation,” he told the Financial Times in an interview last week, in which he also expressed admiration for the work of the World Bank’s private sector arm, the International Finance Corporation.

But Mr Mnuchin, who just last month led US efforts to block G20 language renouncing protectionism, still faces a long road ahead to prove the administration’s commitment to an internationalism that Mr Trump has assailed.

“It’s America first, you better believe it,” declared the US President to a crowd at a toolmaker in Wisconsin last week as he signed an executive order aimed at bolstering “Buy American” laws that require the US government to buy domestic goods.

Mr Blanchard is among those who argue that the economic risks of populism are “probably not catastrophic” in the US and other advanced economies thanks to the “checks and balances” in their political systems.

Even in France the election of either Ms Le Pen or the far-left’s Jean-Luc Melenchon would in all likelihood see them confronting a legislature with a hostile majority and struggling to deliver on promises.

“From a macro viewpoint, Brexit is a bump in the road. Even if Greece explodes, I suspect it will not be seen as systemic. Even (President) Trump is likely to be able to do little, leaving North Korea aside,” he said. “When I go around I do not see clear and present macro dangers.”

A DATA GAP

Even the optimists at the IMF concede there are still important reasons to be worried about the global economy. China’s growing debt pile and the authorities’ inability to rein in credit growth still cause shivers among fund economists.

So too does the procession of corruption scandals in Brazil, where Latin America’s largest economy continues to struggle. In Africa, where hopes for a new growth-fuelled reality were so prevalent just a few years ago, the two major economies of Nigeria and South Africa are languishing.

Mr Maurice Obstfeld, the IMF’s chief economist, said the present optimism should be tempered by the lower potential growth in productivity that governments seem to have been too ready to accept since the crisis.

“We are seeming to converge on what (Ms Lagarde) has called a ‘new mediocre’ of lower long-term growth driven by lower productivity growth,” he said. “(Though) we certainly do not think that is necessarily our destiny.”

Mr Mark Carney, governor of the Bank of England, is among those who point to a gap between so-called “soft” confidence data and “hard” economic results. “There has been a much more positive outlook (for the global economy) over the course of the past six months,” he said in Washington. “But there is still a fairly significant gap between ... corporate enthusiasm versus corporate spending.” That soft/hard data gap is perhaps most evident in the US.

The National Federation of Independent Business’ survey of bosses’ optimism hit its highest reading since 2004 in January, and has edged only slightly lower since.

The University of Michigan’s survey of consumer sentiment points to the strongest view of current economic conditions in 17 years, with the reading only a shade below 1999’s all-time peak.

However, many economists expect this Friday’s first-quarter US GDP numbers to point to a soft patch. The Atlanta Federal Reserve’s “GDP Now” tracker points to annualised GDP growth of just 0.5 per cent in the first three months of 2017.

Retail sales dropped 0.2 per cent in March, following a 0.3 per cent February decrease.

The significance of soggy first-quarter numbers should not be over-dramatised. But heady predictions from the Trump administration that it can deliver sustained growth of 3 per cent or more still appear far-fetched. And that will stay true if Mr Trump falls further behind in attempts to deliver his economic agenda.

Healthcare reform was meant to pave the way to significant tax reform, yet talks in Congress remain snarled on both fronts and Mr Mnuchin last week admitted that he will fail to meet his own August deadline for tax reform. An infrastructure plan faces similar doubts. Still, the overall optimistic tone remains.

European officials insist that a region that has become a byword for high unemployment and persistent disappointment is on the mend. According to Mr Pierre Moscovici, the EU’s economics commissioner, Europe’s recovery is “firming and broadening across sectors”, though he concedes a “two-speed eurozone has emerged”.

Mr Klaus Regling, managing director of the European Stability Mechanism, the eurozone’s bailout fund, expressed frustration that Europe’s nascent growth story was “not sufficiently recognised”.

Mr John Rice, who as vice-chairman oversees GE’s international operations, argues that the last piece missing from a global recovery would be a bounce in commodity prices that would help many emerging economies. He is sanguine about protectionism and political risk.

The new US administration, he argues, is just like any of the 20 to 30 new governments that GE deals with around the world in any given year. “It’s a fact-based world,” he said.

And that, said Mr Rice, is helped by a world economy that is “better than we’ve seen it in a few years”, adding: “That’s the world that we see. It’s more positive than negative.” FINANCIAL TIMES

ABOUT THE AUTHOR:

Shawn Donnan, Gemma Tetlow and Sam Fleming are respectively the Financial Times’ World Trade Editor, Economics Correspondent and US Economics Editor.

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