Message from the IMF bridge: full speed ahead, mind the inequality
LONDON (Reuters) – When Christine Lagarde, the International Monetary Fund’s no-nonsense boss, spoke to Harvard University this past week, she had some good news: nearly 75 percent of the world is experiencing an economic upswing.
Why, then, was her speech given the somewhat bearish title “A Time to Repair the Roof”?
One reason is that the IMF has to worry about everyone, not just those who are doing well. If nearly 75 percent of world economies are growing, more than 25 percent are not.
Some of the strugglers – not for the first time – can be found in Africa, where the two biggest economies, Nigeria and South Africa have only just crawled out of recession and could still be teetering.
The IMF’s last outlook for the sub-Sahara region suggests 2017 growth of 2.6 percent – around a full percentage below that for the world as a whole and less than half the 1999-2008 average of 5.6 percent.
“The recovery is not complete,” Lagarde told the Harvard audience. “Some countries are growing too slowly, and last year 47 countries experienced negative GDP growth per capita.”
This brings up a second reason for Lagarde’s tempered celebration of recovery – inequality.
There is no question that the gap between countries has been narrowing, as Lagarde told the Harvard glitterati. China, Brazil and India, for example, are now major economic players. But within economies themselves there are many left behind.
Most of these are the “bottom billion” described by economist Paul Collier in his 2007 book of the same name – people completely untethered to the global economy and any wealth it might bring.
But others in advanced economies – though relatively less poor – are now railing against being left behind. They range from Britain’s public servants to primary school teachers in the Netherlands and nurses in parts of Australia.
The election of Donald Trump as U.S. president, Britain’s vote to leave the European Union, and the rise — albeit modest — of the far right in Germany are all widely viewed as reflecting disaffection brought on by the unequal share of the global economy’s spoils.
Hence, Lagarde’s focus on what needs to be done right now: rich countries should spend more, central banks should communicate more clearly and public debt needs to be brought under control.
It also explains the title of her address, a riff on John F. Kennedy’s comment: “Pleasant as it may be to bask in the warmth of recovery… the time to repair the roof is when the sun is shining.”
It is not unrelated that the euro zone – barreling along a surprisingly smooth growth path – finds itself facing two potentially destructive threats.
The first is the possibility in the coming week that Catalonian separatists will declare unilateral independence from Spain.
Setting aside the politics, such a move could strip nearly 20 percent off Spanish GDP – a bit like California and Florida together cutting loose from the United States.
How the European Union would handle such a things would simply add to its Brexit headache. Rump Spain would retain its place in the top four of euro zone economies, but much diminished.
The second hit would come if eurosceptics – some of who want to leave the euro zone — gain power in Italy at an election that must take place next year.
Germany’s economy is steaming ahead – latest data: industrial orders soaring in August – and in France, the official statistics agency has raised its 2017 growth outlook to the highest since 2011.
But they cannot carry the load alone, one reason, perhaps for the European Central Bank’s softly-slowly approach to pulling back stimulus.