The latest IMF world economic outlook released yesterday contains the usual mix of good news and bad news so beloved of economists. But amid the projections for GDP growth the IMF delivers not only some warnings about the risks ahead, but also a slap to governments around the world who are now seeing the chickens of decades of policy that has driven inequality coming home to roost.
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Gone are the days of the pessimistic IMF world economic outlook reports that seemed like conversations at an emo-economists convention. Just two years ago the April 2016 outlook was titled “Too Slow for Too Long”, but the latest outlook released this week is much more upbeat – “Cyclical Upswing, Structural Change”.
And there has certainly been an upswing. Whereas in 2016 the world economy grew by just 3.2% – the slowest since the GFC year of 2009, in 2017 the IMF estimates the world’s GDP grew by 3.8% – the fastest since 2011:
World GDP growth
Grey = IMF projections
Created with Raphaël 2.1.2
Chart: Greg Jericho Source: IMF WEO, April 2018 Get the data Created with Datawrapper
The big strength came from the advanced economies of Europe, the USA and Japan, while China’s steadily slowing growth improved to 6.9% – the first time growth had increased since 2011.
The really good news has been the US – the stimulus from the tax cuts, which look set to massively increase the US government’s budget deficit, has seen the IMF over the past year increase its estimate of growth for 2017 and 2018.
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A year ago the IMF was projecting the US economy would grow by 2.5% over the following 12 months. It then revised that figure down to 2.3% in the October 2017 outlook, before increasing it in January to 2.7%. Now it projects growth of 2.9%:
IMF projections for GDP growth in 2018
Created with Raphaël 2.1.2
Chart: Greg Jericho Source: IMF WEO, various Get the data Created with Datawrapper
For Australia, the IMF sees growth much in line with that projected by the treasury and RBA (not surprising given they use these projections as a guide) and has the economy set to grow at 3% this calendar year – which is roughly what it has been estimating would be the case for the past five years.
Our unemployment rate is projected to continue to fall from its current level.
The IMF however is less optimistic now about how quickly it will fall. A year ago the IMF projected Australia’s unemployment rate in 2019 would average 4.97%, whereas the current estimate remains in line with its projections of October last year of 5.16% and that it will only get to 4.97% in 2020.
What has changed since October is that rather than continue to fall in 2021 and 2022, the IMF now believes it will remain at that 4.97% level:
IMF projections for Australia’s unemployment rate
Chart: Greg Jericho Source: IMF WEO Get the data Created with Datawrapper
The IMF’s projections are rather more optimistic than those of either last year’s budget or the mid-year economic and fiscal outlook issues in December.
The Myefo has our unemployment rate in 2019-20 falling only to 5.25%. It will be interesting to see if these more optimistic figures are reflected in the projections in next month’s budget:
Projections for Australia’s unemployment rate
The Budget and Myefo projections are for the financial year- ie 2017 on the graph = 2016-17 in the budget papers
Chart: Greg Jericho Source: IMF, Budget 2017-18 Get the data Created with Datawrapper
But the IMF is rather hesitant to remain optimistic.
The IMF’s economic counsellor and director of the research department, Maurice Obstfeld, told the media that “the present good times will not last for long”, which rather begs the response of, “wait, these are the good times?!”
One reason the IMF sees bad news ahead is that the US tax cuts which have provided some stimulus are unfunded, and thus there will need to be some severe spending cuts in the coming years.
Trump’s economic plan is essentially the equivalent of a party host passing around the tequila bottle at a party and telling everyone they’re having so much fun now that they won’t get a hangover tomorrow.
The IMF also throws into the ring the issue of Trump’s trade wars, suggesting that “an escalating cycle of trade restrictions and retaliation is another risk”. And Trump is not exactly someone who has shown himself able to mitigate risk.
But the problems are more structural than just a Trump presidency.
The IMF notes that “in advanced economies, aging populations and lower projected advances in total factor productivity will make it hard to return to the pre-crisis pace for the average household’s income growth”.
Certainly GDP per capita is suggested to slow across the major economies – including Australia:
Average GDP per capita growth
Created with Raphaël 2.1.2
Chart: Greg Jericho Source: IMF WEO April 2018, derived Get the data Created with Datawrapper
Here the IMF hands out a well-deserved slap to governments (and to be honest, itself, given its own policies prescriptions of the past 30 years).
The outlook suggests that one of the risks ahead is that following from the GFC there are higher debt levels and “widespread public scepticism about policymakers’ capacity and willingness to generate robust and inclusive growth”.
It argues that “diminished prospects for household income growth in advanced economies, coupled with trends of higher polarisation in jobs and incomes, have fuelled a widespread political backlash hostile to traditional political modalities”.
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Or in other words – when you spend 30 years telling everyone we need greater labour market flexibility, greater international competitiveness, and you find households incomes don’t grow, don’t be surprised if voters start getting antsy when you suggest more of the same.
It’s not that all the economics policies of the past 30 years have failed to deliver – the problem is what they failed to consider – that growth needs to be inclusive, not geared towards the top end.
And yet here the IMF remains hostage to its own history.
In its most recent review of Australia’s economy, it noted approvingly plans to cut the company tax rate. And yet such a policy is hardly inclusive and merely continues the trend since 1980 which has seen the richest 1% in this county go from holding 4.5% of national income to more than 9%.
The IMF notes that “ scepticism will only be reinforced – with negative political consequences down the road – if economic policy does not rise to the challenge of enacting reforms and building fiscal buffers”.
I would suggest that means being willing to note that the race to the bottom of the company tax rates is not the way to improve things, lest you wish to continue calling a period of flat household income growth “the good times”.