IMF World Economic Outlook: The glass is half empty

The latest World Economic Outlook from the International Monetary Fund (IMF) sketches out a rocky economic recovery with risks predominantly on the downside. The risks include an increasing fragmentation of the world economy into geopolitical blocs. The trend toward greater friendshoring and nearshoring has become a reality by now and is likely to take a toll on economic growth. Even the IMF does not have a simple solution to the problem.

The IMF wags an admonishing forefinger

At this year’s spring meeting, the IMF stayed true to its traditional role as an alarmer and an admonisher. In its latest World Economic Outlook report, the IMF did not want to overly point to signs of a mildly improved macroeconomic climate, but nor did it wish to forecast the next financial crisis. In the sweet spot between those two poles, the IMF sketched out a rocky economic recovery in which risks on the downside continue to predominate. The IMF’s admonishing forefinger urged central banks to pursue steady but at the same time flexible and clearly communicated monetary policies that don’t repeat past mistakes (i.e. easing too soon by lowering interest rates). Meanwhile, in the face of rising budget deficits and mounting debt, the IMF’s message to governments was to rely less on economic stimulus in the future and to keep an eye on debt sustainability. Finally, the report again contained a call to halt global warming and to speed up the green transition.

​Past its peak | Potential growth has been revised downward for years

Historical evolution of IMF’s 5-year world growth forecasts​

Sources: International Monetary Fund, Kaiser Partner Privatbank

Global growth: Not what it used to be

One sobering revelation in the latest World Economic Outlook report was the finding that the global economy will not return to pre-pandemic growth rates. With a projected world GDP growth rate of just +3% for 2028, the IMF’s long-term growth forecast this time around is lower than ever before (note: the IMF has been issuing half-yearly growth forecasts since 1990). After peaking at +4.9% in 2008, global potential growth has been continually revised downward ever since. The causes identified by the IMF for this seemingly irreversible trend make sense. Emerging economies like China and South Korea have raised their standard of living and, at the new level, can no longer continue growing at the high rates of the past. At the same time, growth of the working-age population is slowing or is even already contracting in many industrialized nations and some emerging economies. The dimmed outlook – particularly for former mainstays of growth like China – brings forth many challenges. One of them is that poorer developing and emerging economies will now have an even harder time climbing the prosperity ladder in the future.

Deglobalization in charts (1) | More and more trade barriers

Number of trade restrictions imposed​

Sources: International Monetary Fund, Kaiser Partner Privatbank

There’s no denying deglobalization (any longer)

The analysts at the IMF view the increasing geoeconomic fragmentation of the world as another reason for the particularly feeble growth outlook this time. The IMF devoted an entire chapter to this issue in its April report and accordingly delivered a lot of facts about it. Globalization, according to the IMF, reached its zenith in 2008 and has been on the retreat for more than a decade now. The continual increase in the number of non-tariff trade barriers reflects this. A further intensification of the deglobalization trend has been observable since 2018 as a result of the stepped-up trade war between the USA and China. Furthermore, the analysts at the IMF have detected a shift in global foreign direct investment flows over the last five years or so. Asia (and especially China) have registered a decrease in foreign direct investment since then, particularly in strategically vital sectors. The splitting of global capital flows into geopolitically aligned blocs could shave up to two percentage points off global economic growth, according to simulations run by the IMF. The growth losses, though, would be unequally distributed: whereas economic output in the USA would be reduced by only 1%, the “price” for countries particularly dependent on foreign direct investment and trade would amount to up to 6%. Developing and emerging economies would once again be the ones hardest hit.

Deglobalization in charts (2) | China is losing allure

Number of foreign direct investments, annual average

Sources: International Monetary Fund, Kaiser Partner Privatbank

No simple solution at hand

However, even the IMF does not have a (simple) solution to the problem to offer. It urges the world to come up with a concerted, coordinated answer and views strengthening the multilateral trade system as a lever to that end. This includes improving World Trade Organization (WTO) rules in critical areas such as agricultural and industrial subsidies and fully restoring the WTO dispute settlement system. Too good to be true? In our view at least, it is very unlikely that the increasingly hostile blocs facing off against each other under theantagonistic leadership of the USA and China will pursue rapprochement anytime soon.

Meanwhile, the IMF also has taken a critical stance on the phenomenon of friendshoring. Although relocating production to nearby countries and “friendly” ones that share similar values (or repatriating production) reduces political risk and potentially preserves a technological advantage, in many cases it could reduce diversification of sources of materialsand natural resources and thus increase vulnerability to economic shocks. Moreover, this “hedging” would lead to efficiency losses and ultimately to higher prices. Nevertheless, this trend, too, no longer seems reversible anytime soon. In fact, according to a study published by Capgemini at the end of 2022, more than half of all globally operating companies already reorganized their production over the last two years and three-quarters of them plan furtherrelocations.

​Deglobalization in charts (3) | “Reshoring” is the word of the hour

Number of mentions of reshoring, friendshoring, or nearshoring in corporate earnings reports

Sources: International Monetary Fund, Kaiser Partner Privatbank