If anyone was unaware of the challenges facing the global economy, the International Monetary Fund lays them out well in a new report. The extraordinary stimulus efforts of some of the world’s largest central banks haven’t been enough to produce a healthy global recovery and could be setting the stage for another financial disaster.
There’s plenty governments can do to address both problems.
The IMF expects advanced economies to grow by just 1.8 percent this year and 2.3 percent in 2015 — slower than its forecast of three months ago and well below the 20-year pre-crisis average of 2.9 percent. At the same time, it worries that central banks’ efforts to boost demand with very low interest rates and other measures may be setting investors up for a fall, particularly in U.S. markets for risky corporate debt.
Why is growth so slow? Partly because the burden of stimulating growth has fallen too heavily on central banks — and some of them have been more effective than others. The Federal Reserve acted boldly; it’s now close to ending an unprecedented bond-buying program that leaves it holding more than $4 trillion in securities. The European Central Bank has been more timid; as a result, the threat of deflation in the euro area is growing. The ECB needs to adopt Fed-style quantitative easing without further delay.
But central banks can’t do it all by themselves. Debt burdens, long-term unemployment and poor infrastructure are holding back growth in many developed countries. In countries that can afford to borrow, such as the United States and Germany, careful investment in transportation and communication systems could pay for itself — boosting growth by enough to reduce public debt burdens. In fiscally challenged countries such as Greece, household and corporate debt relief could free up funds for consumption and investment. Many countries in the European Union also need to make hiring easier and staying unemployed more difficult.
Financial booms and busts are inevitable — but systems can be made more resilient. It’s crucial for banks and other market participants to finance their activities with more equity, which absorbs losses in bad times and limits financial contagion. The U.S. has been heading in the right direction, and there’s been progress elsewhere, too — but not enough. The loss-absorbing capacity of the world’s largest financial institutions remains far too small.
In addition, global regulators still haven’t built a financial early-warning system to identify concentrations of risk — a subject they should take up next month at the meeting of the Group of 20 developed and developing nations in Brisbane, Australia.
The policies needed to make this feeble recovery stronger and more solidly based are clear enough. What’s lacking, especially in Europe, is a sense of purpose and urgency.