In the economy there is no room for complacency

(World Bank, CC BY-NC-ND)

The economic policy leaders participating in the annual meetings of the IMF and the World Bank called on central banks to continue policies based on low interest rates.

At the annual meetings of the International Monetary Fund (IMF) and the World Bank (WB) in Washington, the prevailing opinion was that the global economy is in a good shape. The positive attitude partly stemmed from the updated forecasts for economic growth – in the years 2017-2018 the global economy is set to grow at a rate of 3.6 per cent and 3.7 per cent, respectively (about 0.1 percentage point higher than anticipated back in the spring), as well as from the good performance of the markets. The continuation of economic growth supported by the improvement in trade at the global level influenced the market participants’ positive assessment of the macro-economic prospects, despite the insufficient increases in investment and productivity levels and the persisting uncertainty concerning the prospects for inflation.

Most of the participants in the meetings of the IMF and the World Bank did not seem to be concerned about the upcoming normalization of monetary policy. They were satisfied with the existing economic growth environment and optimistically evaluated the prospects for the market of assets, and in particular shares. Such conditions are conducive to a higher risk appetite. Meanwhile, uncertainty is associated with the possibility of sustaining these positive macroeconomic and market trends in the future.

The representatives of the European Union, and especially the Eurozone, were particularly pleased with the current economic situation in Europe, pointing to the improving economic growth, labor market and profits. European leaders emphasized the positive features of the European Union’s economy compared to the situation in the United States, but at the same time pointed out productivity problems – at both the local and global level.

The participants presented positive opinions regarding the economic prospects of China. In their assessment Chinese economic policy will continue to support economic growth and no changes are expected in this respect following the Party Congress in autumn.

The factors that could adversely affect the positive economic conditions in the world include trade protectionism – which especially applies to the United States (there is a risk of failure of the negotiations on the NAFTA trade agreement) – and North Korea’s possible actions concerning the use of nuclear weapons. The risk associated with the normalization of monetary policy (further increases in interest rates by the Federal Reserve, a stronger dollar and upward pressure on the currencies of emerging countries) was assessed as limited, but nonetheless present. On the other hand, the political turmoil associated with Brexit, the independence referendum in Catalonia and the deal with Iran were not seen as posing systemic risks to the global economy.

Other factors which may become a source of concern for the global economy include the high levels of financial leverage, particularly in the case of non-financial operators (the real estate markets in many countries and enterprises in some emerging countries), as well as the high levels of complacency among policy makers about the previously conducted policies. Furthermore, the robust growth of the global GDP and the seemingly limited risk could increase investors’ appetite for more risky assets, including assets of emerging economies.

During the meetings it was pointed out, however, that there is a small probability of a repetition of the so-called taper tantrum phenomenon (along with the negative implications for emerging economies) as a consequence of the departure from accommodative monetary policy in the developed economies. This is due to three factors: the strengthening of the economic foundations in emerging countries, lower inflows of capital to these countries and a better communication of monetary policy by developed countries.

In the summaries of the meetings it was pointed out that although the recovery in the world economy is still underway and the economic outlook is favorable, there are many risks (including political risks associated, among others, with the growing reluctance towards globalization) that could interfere with the sustainable reconstruction of the global economy – in spite of signals that the year 2017 will be the best year of the decade. Inflation is below target in the majority of the advanced economies, and potential growth remains slow in many countries. Short-term risks are limited, but medium-term risks are growing, and so are geopolitical tensions. For this reason, the finance ministers and central bankers from the 189 IMF member countries will have to focus on responding to these threats through appropriate monetary, fiscal and structural policies.

Monetary policy in particular should remain accommodative in the case of countries where inflation is below target, and the output gap is negative (this mainly applies to developed countries). The mutual interaction of these policies is particularly important at a time when the global economy seems to be finally achieving a lasting recovery after the deep recession caused by the financial crisis in 2008.

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