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The Economy is Growing, but Risks Lie in Uncertainty

The global economy has been on a strong upswing since 2016, but there still places that are struggling and issues that still need to be dealt with, according to Maurice Obstfeld, chief economist of the International Monetary Fund. Obstfeld shared his views at “The Global Economy: Higher Mean, Higher Variance?” May 1, 2017.

Obstfeld showed that IMF indicators for world trade are ticking up, as are prices for petroleum and metals. At the same time, the U.S. appears to be at full employment while market volatility, as measured by the VIX index, is at a decade-long low.

However, there are a large number of collective action problems in the world that pose economic threats, he noted. “Climate, disease controls, famine, refugee problems – these are all legitimate causes for the international community that affect the economy, ”Obstfeld explained. Unfortunately, he noted, getting everyone on the same page to address these problems is the tricky part.

“For risks, we have more than the usual array of fairly serious possibilities,” Obstfeld added. He noted that because of lower productivity growth over the last ten years, there are dampened expectations for the future, which affects consumption behavior. Plus, along with deflation concerns and worries over the pace of China’s growth, there are the consequences of dollar appreciation.

“A higher dollar can lead to higher US interest rates, which makes it harder for emerging markets to service debts,” Obstfeld observed. Another danger of a strong dollar is that the current trade deficit will increase.

But the IMF has solutions. As Obstfeld explained, the IMF does health check-ups on nations around the world and looks at issues from a global perspective to see how all the pieces fit together. “Very broadly, we feel that a number of policy approaches would help to avoid a downside to this economy,” he said. These policies include monetary accommodations where inflation rates are below healthy averages; smart fiscal policies; and strong national reforms that would make markets more competitive and improve the business climate.

Unfortunately, not everyone sees these issues the same way. A good example of this is Greece, an issue an audience member brought up in the question period. Obstfeld clarified that the IMF is not a lender to Greece, which is now in its third support program, but it does serve as an adviser to governments. As such, the fund negotiates with other European countries on the types of reforms that will support growth, improve the business climate, and reduce uncertainty in Greece, keeping in mind that the Mediterranean nation’s economic situation creates enormous unrest.

Leading the discussion, Institute director Lars Peter Hansen asked Obstfeld the different time horizons over which uncertainty about fiscal stresses can play out, and how the IMF monitors such uncertainty. Greece again offered a good illustration for that challenge.

The three-way talks among the IMF, European countries, and Greece bring a high-level uncertainty to the success of negotiations, Obstfeld said. The IMF would like to get the Europeans to agree to a reduction in the outstanding debt, most of which is officially held, and would like to see the European countries drastically lengthen the time Greece has to pay it back to, perhaps, 100 years. “That would make Greece able to service its debt with budget surpluses and with smaller social issues,” Obstfeld observed. “But the Europeans don’t think the situation is that bad.”

Of course, the IMF has policy recommendations for other countries, including the United States. Americans in lower economic brackets have not been benefitting from trade and other healthy economic activities before the 2008-09 crash, and there has not been a lot of growth to spread around since then. “We are not going to see more trickle down unless we have new policies on education, re-skilling, and ways to deal with technology shocks,” Obstfeld said. This lack of benefit to the lower echelons of the economy is has been true recently of all advanced economies that rely on trade, he pointed out. “Tensions have grown, and there is an expectation that policy should be able to do more than it did.”

Underlying all of these challenges is the issue of uncertainty – of who will be in power and what policies will be pursued. While uncertainty has been a hot topic since the Great Recession, it has not ebbed, which gives the IMF a lot to discuss. “Uncertainty breeds uncertainty,” Obstfeld noted, “especially when it is coupled with ineffective policy.”

One sign of the pervasiveness of uncertainty is that since 2008, IMF economists have shifted to publishing an economic outlook quarterly, rather than twice a year. While the Fund would like to go back to twice a year publishing, new economic circumstances and political events like Brexit arise regularly and new data is required immediately.

But all of this data without the right policies is not going to improve the world’s economy or the lives of the people in it. The ideas are out there; it is consensus and the will to implement policies for effective change that is needed.

—Robin I. Mordfin