IMF Staff Note to G-20 on Global Prospects and Policy Challenges
Low and falling growth along with rising inequality make for a challenging policy environment. The weak outlook can further reduce incentives to invest and slow down trade, adding to demand shortfalls and limiting the room for productivity gains going forward. At the same time, income growth has not only been meager, it has bypassed low-income earners in many countries, raising anxiety about globalization and worsening the political climate for reform. These developments threaten to open another negative dynamic, in which political action fails to deliver the structural reforms needed to lift growth and instead turns toward inward-looking assaults on free trade.
The balance of risks remains skewed to the downside. Potential threats to growth include stalled reforms and protracted low inflation that dampens inflation expectations further, raises real interest rates, and, thereby, lowers incentives to invest. China’s transition to a more balanced growth path could face difficulties with potentially significant spillovers. In addition, geopolitical risks and uncertainties about the steps to follow the “Brexit” vote continue to threaten the outlook, especially in Europe, where financial institutions are facing a number of challenges.
Sustainably higher and inclusive growth requires more forceful, comprehensive, and well communicated policies, including greater cooperation on the global policy agenda. Given that many interconnected factors restrain growth, policymakers must work all necessary levers. At the same time, it will be important to explain to the public the benefits of decisive action and, where necessary, provide effective support to those who disproportionately shoulder the burden of adjustment. A comprehensive approach demands:
- Reforms to raise underlying growth. Country needs differ, but collectively the G-20 is falling short of its ambition to raise GDP by an additional 2 percent by 2018 (“2 in 5”). More progress is urgent. At a minimum, countries should strive for swift implementation of all announced measures, but in many cases, additional efforts will be needed. These would be most effective when prioritized around each country’s reform gaps, level of development, and cyclical position.
- Shorter-term policies to support reforms and contain risks. Where demand is still lacking, fiscal and monetary policies can support short-term growth while accelerating the positive impact of structural reforms—for example, by allowing new job seekers to find work faster. With policy interest rates near or at their effective lower bounds in many countries, fiscal policy has an especially vital role to play—including through additional public investment where there is fiscal space, making tax-benefit structures more efficient and equitable, and addressing private sector debt overhangs and balance sheet problems. Both fiscal and monetary policy will be more effective when operating within coherent frameworks that anchor inflation expectations and ensure fiscal resiliency, thereby broadening the scope for countercyclical policies where necessary.
- Coordinated action to make the case for growth and adjustment. G-20 leaders should seize the opportunity to explain how the right policies can raise growth, ensure that it is widely shared, and help those who need to adjust to the changing global economy. At the national level, best practice should build worker skills and foster mobility, and can include income policies, among other approaches. Globally, promoting trade integration, reducing external imbalances, and managing spillovers remain essential.