Five Factors Shaping the Economic Future
IMF Director José Viñals on the transitions defining global growth
“The probability of another global economic crisis is still low,” IMF Chief, José Viñals at IESE Barcelona / Photo: Jordi Estruch
“The global economy is stuck between gears,” said José Viñals, the International Monetary Fund’s director of financial and capital markets. “Advanced economies are struggling to get out of first or second. That’s better than being stuck in neutral or reverse, but it’s not enough to compensate for emerging economies, which were in fifth gear but are now shifting down quickly.”
Viñals was addressing an audience of IESE MBAs on IESE’s Barcelona’s campus as part of the Global Leadership Series. In a presentation titled “Acting to Secure Robust Growth and Financial Stability,” he outlined the current global economic situation, the five factors affecting it, and three potential futures, ranging from the optimal to “the disastrous.”
The global economy has recovered from the Lehman crisis of eight years ago, with growth of more than three percent per year over the last five years. This, according to Viñals, is the good news. The bad news is that confidence remains fragile and that the recovery has been disappointing compared with expectations.
That said, Viñals believes that the probability of another global crisis is very low, as the core banking system is stronger now than it was eight years ago. There are, however, other risks, which derive from “four plus one” transitions taking place today – four economic and one political.
The first is the shift to lower commodity prices, especially oil. This is a “sea change for producing countries and the energy sector,” says Viñals.
The second factor is China, currently undergoing fundamental change in its economic model to be less reliant on exports. The Asian economic powerhouse is also implementing financial transition towards a more open and transparent system without undermining stability.
Interest rates and monetary transitions are another cause of uncertainty. A quarter of the world is now living with negative rates, which Viñals described as “unprecedented.” The United States is moving rates up from close to zero but Europe and Japan continue to do “unconventional things.”
Changing regulations and risks, which bring tremendous challenges for the banking sector in the post-crisis environment, are the fourth economic factor at play.
And the final factor is political uncertainty. Forthcoming referendums and elections in the U.K., Spain, France, Germany and the United States are affecting policymakers’ ability and “willingness to do the right thing,” says Viñals, such as implementing structural reforms and pro-growth policies. He noted that there is, at present, a high degree of discontent within societies, resulting in decisions by electorates that are very different to those seen in past.
Complicating matters further are geopolitical concerns such as the humanitarian challenge of helping refugees and security-related concerns, which play a significant role in shaping confidence globally.
The best-case scenario, in which the appropriate policies are put in place at the appropriate time, would result in enhanced confidence, reinforced stability, and 1.7 percent more economic growth. Although this “could and should happen,” said Viñals, the IMF has projected that the current growth rate is likely to continue. He warned, however, that this steady but disappointing growth is fragile and at risk.
This can be seen in the strong downward pressure on financial markets that occurred worldwide in January and early February this year. “It started with doubts about China, hit commodity prices hard, and had deep impact on equity markets in advanced markets. We were very scared – it looked like a market meltdown.”
Although that didn’t happen and markets recovered, there is still a key lesson to learn. There is a possibility that episodes of turmoil of similar or larger intensity and duration could have an impact on real economy, creating a negative feedback loop.
In this worst-case scenario, global GDP five years from now would be nearly four percent lower than if the present situation were to continue. This is the equivalent of losing one of the next five years’ economic growth. “Not as bad as the Lehman crisis, but almost,” said Viñals.
“The difference between the worst and best case scenarios is 1.5 years’ GDP. Society and citizens are still hurting because of the last crisis, so it is very important to avoid stagnation or slow growth because these would further undermine public confidence in current democratic systems,” he added. To provide insurance against such a scenario, he urged policymakers to change the tools they used to stimulate growth. “Monetary policies are already doing enough. We now need to have financial policies, structural reforms and smart fiscal reforms coming into place to balance the scales.”