For the thousands of business and political delegates attending the annual meeting of the World Economic Forum (WEF) this week, the snowy Davos setting is appropriate given the avalanche of gloom that has engulfed the global economy since the beginning of the year.
But the state of the world economy isn’t new news – we have been here before. The International Monetary Fund (IMF) and World Bank meetings last October were also submerged in pessimism on global growth. This time, however, what started as a crisis of confidence in key countries is showing worrying signs of becoming a self-fulfilling prophecy.
The economic projections are not all bad. The IMF predicts global growth of 3.4 percent this year and 3.6 percent in 2017 in its latest World Economic Outlook. And while the forecasts are slightly lower than the ones issued in October 2015, the difference is statistically insignificant.
Developing countries will face slower growth, something they have not experienced in over a decade
Nevertheless it is clear that 2016 is going to be a year of great challenges. According to the IMF, advanced economies led by the US will see a modest recovery this year and next, while developing countries will face slower growth, something they have not experienced in over a decade.
What can policymakers do to bolster growth? Maurice Obstfield, the IMF’s Chief Economist said “policymakers should be thinking about short-term resilience and ways they can bolster it, but also about longer-term growth prospects.” He added that long-term actions “will actually have positive effects in the short run by increasing confidence and people’s faith in the future.”
Such faith in the global economy is in short supply at the moment and certainly evident at Davos. Speakers have cited a toxic combination of factors which are denting confidence and growth prospects – falling oil prices (although this represents a bonanza for oil importing countries such as India), a strengthening US dollar and higher US interest rates leading to huge outflows from emerging markets, and continued worries about China.
What’s the short term solution to shore up defences and build confidence fast? The IMF and other leading economic institutions believe the answers lie in:
- Market concerns could be eased if emerging countries facing economic pressures improve macroeconomic management and communicate better
- Finding new sources of growth, in particular for developing economies. This could involve boosting domestic demand and reduced dependence on exports
- Well-designed structural reforms (particularly in infrastructure) could help restore investor confidence in the short term
- Boosting business sentiment by streamlining legislation and processes
All eyes are on China and its stewardship of the G20 in 2016
While delegates at Davos debate these issues vigorously this week, the real policy solutions will be determined elsewhere.
In fact, all eyes are on China and its stewardship of the G20 in 2016. The kick-off meeting will be held in the third week of February, by which time we will all be hoping for a coherent fix for the global economy. Anything short of this is only likely to fuel further panic.