The International Monetary Fund has added its voice to those of other major economic organizations warning of lower world economic growth and the dangers of another financial crisis, possibly sparked by a flood of capital out of emerging markets once interest rates in the US start to rise.
In a note prepared for finance ministers and central bankers meeting in Cairns this weekend prior to the G20 summit in November, the IMF said global growth was weaker than its forecast last April. It cited a “surprisingly soft first quarter in the United States,” in which the American economy experienced a contraction, weak performance in Latin America, contraction in the second quarter in Japan and “downward surprises” in Europe where “activity stagnated in the second quarter, World Socialist Web Site (WSWS) reported Friday.”
In the medium term it pointed to the possibility of broad “growth stagnation,” low inflation and even deflation in some advanced economies.
In a crucial observation, it noted that lower growth was the outcome of “investment weakness at the global level in the first half of the year.” This signifies that, despite the lowering of interest rates to zero in most advanced economies, investment, the key driving force of the capitalist economy, is not being undertaken.
It said the risk of “secular stagnation” — a long period of very low growth and weak demand — in major advanced economies, particularly Europe and Japan, could not be ruled out. Growth momentum had not resumed in Europe despite very low interest rates.
However, this has only increased the danger of another financial crisis. Increased risk taking, because of low rates of return on government bonds and other financial assets regarded as secure, coupled with “financial optimism,” due to the continued supply of money from central banks, could “eventually trigger abrupt corrections.”
Other risks were associated with the “normalization” of interest rate policies in the US and the UK, it said. This refers to the danger that as American and British interest rates increase, even if only by a small amount, volatile finance placed in “emerging markets” by asset management organizations will suddenly exit. Because the size of these investments is large compared to the GDP and the financial markets of these countries, any sudden exit could have a major impact and trigger a financial crisis. A warning of such an event was provided in the middle of last year and again at the beginning of this year when there was an outflow of funds in response to expectations of increased interest rates in the US.
On the day the IMF assessment was issued, further signs of global economic instability emerged, this time from China. Following a decision on Wednesday to inject $80 billion into the banking system, the country’s central bank yesterday cut a major official interest rate by 0.2 percent as new data showed further falls in property markets across the country. Real estate and construction form a major component of the Chinese economy — as much as 20 percent according to some estimates — and is dependent on the supply of cheap credit.
The gloomy IMF outlook follows a broadly similar assessment of the state of the world economy prepared for the G20 meeting by the Organization for Economic Co-operation and Development released earlier this week.
