Economic and Market Update

Having recently spent several days in Washington at International Monetary Fund (IMF) and Bretton Woods Committee meetings, I thought it might be helpful to summarize some of the main insights from the discussions.

Slower growth expected, globally, and in the U.S.:

As a backdrop, the IMF’s forecasts for global growth are skewed to the downside, primarily due to global trade tensions. For the U.S., the IMF is forecasting growth of 2.3% for 2019, slightly less than the previous forecast of 2.5%.

Comments from Treasury Secretary Steve Mnuchin:

Mr. Mnuchin began by affirming that the IMF and the World Bank were very important players in the global economy. As the IMF’s largest shareholder, he added that the U.S. has a real interest in ensuring that the institution is adequately capitalized, and that the U.S. had no intention of giving up its IMF veto power. Regarding the IMF’s recent downward revision of U.S. growth, Mnuchin emphasized that the U.S. consistently outperforms IMF projections and described the U.S. as “the bright spot of global economic growth.”

On the topic of trade, Mnuchin noted that the priority of the Trump Administration is to level the playing field. He commented that the IMF and World Bank had an important role to play in places like Venezuela and North Korea, but was critical of China’s reliance on funds/loans from the World Bank. A trade deal with China is still being hammered out, he added, and while significant issues remain unresolved, he affirmed that the deal is expected to be beneficial to U.S. agriculture and industrial sectors and to China’s burgeoning middle class. The primary objective in the China talks, he added, was “fair and free trade—which we believe will lead to balanced trade.”

Looking ahead—critical issues facing the global economy:

The discussion, which included Ellen Sirleaf, former President of Liberia, agreed that the forces of technological progress, demographic shifts and climate change rank as the most pressing issues facing the global economy today.

Ms. Sirleaf highlighted the negative impact of climate change, which has the potential to undermine development in many of the world’s economies, particularly the most fragile ones. The pressures of demographics, the rise of populism and isolationism, and the rapid pace of technological innovation all risk leaving more vulnerable countries behind, according to Sirleaf, who added that the World Bank and the IMF must reshape their objectives and mission to help these countries move towards sustainable development. Others noted that, in today’s world, multilateralism is more important than ever, but stressed that the real challenge is to mobilize the resources of the multilateral institutions and to update the old mindsets to be able to address the rise in economic inequality and the critical challenges of climate change. A Global Green New Deal could, for example, fund climate change mitigation efforts as a global public good.

The future of international trade:

The panelists included several trade experts, most notably former U.S. Trade Representative Carla Hills and former Representative Jim Bacchus, who also served as a judge for the World Trade Organization (WTO). “This is the most uncertain time I’ve ever experienced (for U.S. trade),” noted Ms. Hills, predicting that the new U.S.-Mexico-Canada deal is unlikely to be approved this year, and that bilateral negotiations with Japan and the E.U. will be ‘an uphill battle.” Other participants were also critical of the new NAFTA deal, saying that it was designed for “managed” trade as opposed to free trade, although they admitted that a flawed deal was better than no deal. On the ongoing trade talks with China, Mr. Bacchus stressed that the focus should not be on the goods imbalance but on structural problems and moving towards freer trade. Both panelists agreed that although the World Trade Organization (WTO) was in dire need of reform, this multilateral body should be called on more often to adjudicate trade disputes. Says Ms. Hill, “Problems should be fixed in the WTO, not bilaterally.”

Regional Spotlight: Emerging Markets

Below are the main takeaways from a discussion that took place in March 2019 between Gita Gopinath, Research Department Director at the IMF and Catherine Mann, the Global Chief Economist at Citigroup.

Global Growth: Ms. Gopinath indicated that the global economy slowed faster than expected in 2018, so estimates going forward were revised down slightly. The main source of weakness is the Euro area, notably Germany. In emerging markets, China’s economy is slowing as they transition (as per their plan) from export-driven growth to domestic consumption-led growth. The big question is whether the slowdown will be smooth and controlled, or steeper than anticipated. India remains the bright spot among emerging markets.

Main Risks: For the IMF, says Gopinath, the primary risks include tighter monetary policies (although most of the world’s central banks remain accommodative), higher debt levels, and the possibility of steep decline in Chinese economic growth, as opposed to the gradual slowdown that is forecast.

At Citi, noted Ms. Mann, they look at three pillars when assessing risk:

  • Domestic resilience (using measures like labor markets and tech investment), and this generally remains strong except in countries like Germany
  • External headwinds, which currently look to be favorable for the U.S. and Europe
  • Financial conditions. Mann noted that December’s turbulence was largely confined to equity markets and that accommodative monetary policies were proving helpful.

Trade issues: The markets have already priced in a U.S./China trade deal, but the consequences are generally negative for emerging markets. “Success” for the U.S. will mean that China will buy more U.S. goods, meaning a smaller market share for emerging markets and a sizable negative impact on emerging market growth rates. Bilateral trade deals generally disadvantage other countries and fragment global trade integration. They are particularly important in the auto industry, which is very complex and global in terms of supply chains and trade flows. But this is not a uniform story, explains Ms Gopinath. While Korea, for example, will suffer, some Latin American countries, like Mexico, could benefit.

Debt sustainability and systemic risk: Emerging markets that have been able to build up their foreign reserves remain better insulated from interest rate movements in the U.S. Others, such as Brazil and Argentina, are more strapped, with high levels of public debt. In general, however, central banks in emerging markets have demonstrated more resilience and confidence as their credibility on the global stage has increased.

Both speakers agreed that the world’s banking system is better capitalized than it was 10 years ago, and that the global economy is not facing systemic risk from overexposure to volatile asset classes, as was the case in the run-up to the global financial crisis of 2007.

Mann sees good upside potential in 2019 for many emerging markets, especially those with commodity exports. So far this year, capital inflows into emerging markets are up (mainly in China), which is welcome news after 2018’s net outflows. The U.S. Fed’s recent decision to hold off on further rate hikes until the second half of 2019 should help boost capital flows to emerging markets.