IMF warn of global deflation
The precarious condition of the global economy is back in the spotlight. Last week the OECD issued their interim economic outlook, headed: “global growth warning: weak trade, financial distortions’. This week it is the turn of the IMF, who are leading on the threat of global deflation and the collapse in world trade. The failure of global demand is no longer be denied. Both call for government support via infrastructure spending. Though the IMF call does not go far enough, and neither admit their part in causing this dangerous situation.
The following charts show just how near to deflation (i.e. falling prices) the IMF think advanced economies now stand. The left hand chart looks ahead to 2016, when the figure is -0.1 per cent.
In emerging economies the figures are a little higher, but the IMF see an abrupt reduction.
In another chart they show the proportion of countries according to various indicators of low inflation. All measures are at record levels.
The IMF also warn of a significant deterioration in world trade. Though the position was better captured last week by the OECD – with the ratio of world trade growth to GDP growth in 2016 projected to be at the lowest point since the 1980s (the green triangle):
Both institutions recognise that low trade is symptomatic of low growth. Both recognise that low growth is a function of low demand.
(In fact the IMF have not published their full report, but have pre-issued two chapters, one on trade and one on deflation. The even numbered pages of these chapters are headed ‘subdued demand – symptoms and remedies’ – presumably the title of the report.)
And (at last ) the IMF see that the likelihood that “economic slack is greater than estimated in some countries” (chapter 3, p. 3).
Both basically argue that monetary policy has run out of road; the OECD are particularly strong on the associated distortions in asset markets.
Both now want governments to push on infrastructure spending. However in a speech today, Christine Lagarde the managing director of the IMF was surprisingly timid:
Second, as for fiscal policies, few would dispute that better roads and airports, more power grids, and high-speed internet are essential components of modern public infrastructure. The current low-interest environment provides an historic opportunity to make these necessary investments—and to boost growth.
Unlike in 2008, we are not calling for broad-based fiscal stimulus today. The basic principle is that countries with fiscal space should use it—Canada, Germany, Korea, for example. Not all countries have such space and need to guard against debt problems accumulating later on.
She puts her faith in coordinated action, so that the beneficial effects on growth for those countries with ‘room’ to spend are shared.
We can detail various dangerous consequences of deflation. But for the moment the point to stress is that low inflation is symptomatic of a prolonged deficiency of aggregate demand, which is the result of past wrongheaded fiscal policies.
Repeatedly low inflation outcomes have been regarded as ‘good deflation’ by policymakers desperate to deny the consequences of their policies. Repeatedly they have been attributed to low oil prices, with many also seeing this as a good thing. No more.
On the verge of deflation, we might expect something more from the IMF. To deploy the ‘fiscal space’ in those countries lucky enough to have it falls far short of what is necessary. As far as I can see its advantage is purely face saving – the IMF do not have to admit to getting anything wrong, and can present the new policy as a continuation or development of older ones. But really the austerity policies they supported lie behind this deflationary disaster. The necessary action is a material change of course for all countries. For most countries cutting spending has not created ‘fiscal space’. For most countries cutting spending has damaged economic growth far more than expected and made the condition of public finances worse. It is time to take the world economy out of reverse and put it into forwards.