Implications of the Comments From the IMF
Today, IMF Managing Director Christine Lagarde shared her thoughts on the global economy during the United States 2019 Article IV Press Conference. For those not aware, the International Monetary Fund (IMF) is an organization of 189 countries working together to promote stability in the global monetary system. Research from the IMF should not be overlooked as they bring together some of the best minds in economics. For example, in the IMF World Economic Outlook report from April 2007 they mention:
“But there remain risks that the fallout from the housing correction could be amplified, particularly if tightening lending standards in the subprime sector were to lead to a broader reappraisal of credit availability across the economy or if household cash flows were to weaken. Such a development could imply a deeper and more prolonged slowdown or even a recession in the United States, with potential spillovers to other countries.”
These wise words spelled out the fate of the global economy as we entered The Great Recession and U.S. stocks (measured by the S&P 500) lost about 57% of their value from the peak (October 2007) to the bottom of the market (March 2009). Today, the IMF shared their perspective on the global expansion and it would be foolish to ignore their remarks.
On the positive side, they are pleased with demand in the private sector (i.e. businesses) and the policy choices that have been a boon to growth. Unemployment rates are at levels we have not seen since the 1960s and inflationary pressures remain subdued.
Now, the negative news which is better quoted than explained:
“We are concerned that the benefits from this decade-long expansion have, in general, not been shared as widely as they could have been.
If we look at a broad set of social indicators, we see a challenging picture.
…Average life expectancy has trended downward in recent years, income and wealth polarization have increased, social mobility has steadily eroded, education and health outcomes are suboptimal, and while the poverty rate is falling, it remains higher than in other advanced economies.
…As we have highlighted in past consultations, the U.S. public debt is on an unsustainable path. Policy adjustments are needed to lower the fiscal deficit and to put public debt on a gradual downward path over the medium term. There are a range of possible policy options. However, in our view, any successful package will likely require steps to address the expected increases in entitlement spending on health and social security, to raise indirect taxes, and to institute a federal carbon tax.
…nobody wins a trade war.”
In plain language, a more comprehensive picture of the job market shows minor improvements as income inequality rises and economic prosperity benefits a small few rather than the majority. Furthermore, depriving our educational system from necessary funds has resulted is suboptimal education outcomes with U.S. high school students scoring below most other countries in the G7 (seven of the largest advanced economies in the world) in math and reading.
Regarding our fiscal deficit, the U.S. is heading down an unsustainable path and should not be increasing an already massive debt load that will weigh down growth for future generations. As we discuss downside risks to growth, it’s appropriate to mention contentious trade rhetoric coming from the White House. If these “trade wars” spiral out of control and we isolate our country from the rest of the world, the impacts would be devastating. The inability for businesses to plan for their future has strained growth and needs to be addressed before we risk tipping into a recession.
It is imperative to be cognizant about these downside risks so we can take constructive steps to address them. If not, the economic outlook may be cloudy. Until then, our forecast is partly cloudy with a chance of rain.