The vast majority of high-level economic officials gathering at the International Monetary Fund-World Bank annual meetings in Washington this week will welcome and embrace both the recent and the prospective improvements in the global economy. And they should. The ongoing synchronized pick-up in growth has taken a long time to materialize, and is occurring in the context of unusually subdued financial volatility.
As encouraging as this is, it is way too early to declare “mission accomplished.” The recovery still falls short in delivering the high inclusive growth that is needed to deal with a long list of accumulated economic, financial, institutional, political and social challenges. Moreover, four factors highlight the need for nothing more than cautious optimism at this stage, as well as the urgent policy imperative of consolidating and building on recent progress to ensure that it is not reversed.
The drivers of global growth haven’t developed deep enough structural and secular roots. As a result, the pick-up in actual and expected growth is insufficient for the much-needed lift in potential. Markets have done more than just price in the improvement in the global economy. They have also extrapolated it forward, pointing to possible financial fragilities should the growth momentum fizzle out. The global economy still faces an adding-up problem. Just witness the “hot potato” syndrome in the foreign-exchange markets whereby virtually no advanced economy is able and willing to live with a significantly stronger currency. This accentuates the already considerable challenge for an orderly and timely accommodation of China’s continued rise, especially as the world continues an unfortunate stumble toward what Ian Bremmer has labeled the G-0 world—that is, one that lacks global conductors and sufficient international policy coordination. And all this comes in the context of major unknowns about the behavior of key economic relationships in advanced countries, from productivity, wage determination and inflation dynamics to the impact of technology, demographics and climate change.
When judged against these four factors, the improvement in global economic performance, while real, is simply not yet large, durable and confident enough to meet the genuine aspiration of citizens, reverse the worsening of the trifecta of inequality (of income, wealth and, most importantly, opportunity), enable political healing, and reduce the longer-term fragilities associated with high debt, liquidity over-promises and over-reliance on central banks. Further policy actions are required to deepen and strengthen the synchronized pick-up in economic growth that has been long in coming.