The world’s finance ministers and central bank governors gather in Washington this week for the biannual International Monetary Fund meetings. While there will not be the sense of alarm that dominated the convocations in the years after the financial crisis, the unfortunate reality is that the medium-term prospects for the global economy have not been so problematic for a long time.
The IMF in its current World Economic Outlook essentially endorses the “secular stagnation” hypothesis, noting that the real interest rate necessary to bring about enough demand for full employment is likely to remain depressed for a substantial period. This is made manifest by the fact that inflation is well below target throughout the developed world and is likely to decline further this year. Without robust growth in, and greater demand from, these markets, growth in emerging economies is likely to subside. That is even without considering the political challenges facing countries as diverse as Brazil, China, South Africa, Russia and Turkey.
In the face of inadequate demand, the world’s primary strategy is easy money. Base interest rates remain at floor levels throughout the developed world and central banks signal that they are unlikely to rise soon. While the US is tapering quantitative easing, Japan continues to ease on a large scale, and the eurozone seems to be moving closer to this. This is all better than the tight money that in the 1930s made the Depression the Great Depression. But it has problems as a growth strategy.