IMF Sees a Global Boom That's Overly Dependent on Easy Money
January 23 2018 - 5:59AM
Dow Jones News
By Greg Ip
DAVOS, Switzerland -- The world is enjoying its broadest,
strongest growth in years, and everyone has an explanation, from
the U.S. tax cut to the recovery in oil prices.
But for the International Monetary Fund, the answer is rather
simple and disturbing: easy monetary policy. In the outlook for the
global economy released in Davos, Switzerland, on Monday, the IMF
credited the extremely slow pace of interest-rate increase in the
U.S. and still-large balance sheet of the European Central Bank for
why it believes the world grew 3.7% in 2017, its best since 2011,
and will grow 3.9% this year. Both are up slightly from projections
released last October.
Coupled with the booming stock market, that growth has produced
some head scratching among the business and political leaders
gathered here preoccupied by risks ranging from populism to climate
change.
"It is a puzzle," said IMF chief economist Maury Obstfeld. The
tax cut explains nearly all the upgrade in the U.S. growth
projection next year to 2.7% from 2.3%, and smaller amounts for the
U.S.'s trading partners, thus less than half the world's total
upward revisions.
True, the tax cut explains some of the stock market's run-up.
But Mr. Obstfeld notes, "Stock markets are booming in a lot of
countries that have not had tax cuts." Moreover, the regions with
the most striking upgrades to their growth outlooks were Europa and
Asia, not the U.S.
This leads him to attribute the pickup to central banks'
still-highly stimulative monetary policy. This seems odd given that
the Federal Reserve has been raising interest rates and several
other central banks are preparing to do so. But the fact bond
yields had been so low until recently suggests the pace of
tightening has still been historically modest.
One result is extremely high valuations for stocks. At a low
enough interest rate, almost any valuation can be justified. But,
Mr. Obstfeld noted, that makes the market acutely vulnerable to any
shift in perception about interest rates that would hurt
valuations. And, he added in a related blog post, "As important as
they have been to the recovery, easy financial conditions and
fiscal support have also left a legacy of debt."
Mr. Obstfeld warned in the post that the current upturn "is
unlikely to become a 'new normal'".
Markets, he said in an interview, "are excessively sure that
central banks can solve every problem, and they can't, and they've
been telling us they can't. We need fiscal policy, and governments
are so indebted now the fiscal space they have is much more limited
than a decade ago. They especially need structural policies to
raise potential growth rates and deal with inequities challenging
political systems right now."
Write to Greg Ip at greg.ip@wsj.com
(END) Dow Jones Newswires
January 23, 2018 05:44 ET (10:44 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.