Marsh: 5 reasons to be upbeat on world's economy
Gloom will be on plentiful display in Washington this week when finance ministers and central bankers from around the world gather for economic parleying. The International Monetary Fund, which hosts its spring meetings with the World Bank, has warned of prolonged lower growth that will keep debt high — and could pave the way for another global financial crisis. Christine Lagarde, the IMF managing director, who regularly uses these occasions to parade her worries, will once again be front and center as global Cassandra-in-chief.
However, there are five good reasons why the doomsayers are overdoing it.
1) The U.S. is powering its way to recovery, with a generally favorable influence on the rest of the world. Sound fiscal policies and appropriate monetary easing by the Federal Reserve have brought down U.S. unemployment to 5.25% and will sooner rather than later generate a healthy normalization of American interest rates. The ultra-low rates of the past six years are a sign of weakness, not strength. Renewed credit tightening, which if the Fed is courageous should come this summer, would be a sign we are getting back on track.
2) The fall in oil prices is almost universally good news for the world economy.Sure, it has brought retrenchment in some of the world's prime oil exporters, but, with the exception of badly run states like Russia and Venezuela, most oil producers have the reserves to overcome these setbacks. Oil-importing countries, which include a large number of poorer developing countries as well as much of Europe, are huge beneficiaries of the moderate prices. This period of price benevolence will be extended at least for a year or two by the desire of Saudi Arabia and other leading exporters to keep pumping out oil, as well as the relative buoyancy of U.S. shale production.
3) News from emerging market economies — despite slower growth — is positive. China is enduring a slowdown that will put its economy on a more sustainable path, driven by domestic consumption than by inflated exports. India has rediscovered a more stable growth trajectory under new Prime Minister Narendra Modi. Both Brazil and Russia are getting used to a drastic fall in activity, but that might produce better policies in the end. Nigeria, the leading economy and most populous state in Africa, has just held a general election resulting, for the first time, in a government leader's ouster through the ballot box — a sign of democratic maturity likely to unleash a rekindling of economic activity that could reverberate throughout Africa.
4) The firm dollar has been a boon for most countries. It may be holding back U.S. exporters and depressing foreign earnings, but dollar strength is normally good for the world economy. Many countries can gear up for higher exports and their companies earn more abroad. As the world's leading transaction and reserve currency, the dollar can radiate confidence internationally. The decision by the Chinese leadership to let the renminbi follow the dollar upward and become, in time, a reserve currency, is a wise move. The U.S. Congress no longer terms China a currency manipulator, one less cause of world tension.
5) Modest growth is resuming in Europe, still home to many of the world's most technologically adept companies and much R&D brainpower. The European Central Bank's quantitative easing, under which it is buying large quantities of government bonds to stoke up the money supply and ward off deflation, is almost certainly unnecessary and is generating asset price bubbles. But for the time being, it is adding to the momentum of a recovery that was already underway at the turn of the year as a result of healthier bank balance sheets, low interest rates and oil prices.
Behind the scenes in Washington, a debate is growing surrounding who should take over from Lagarde when her five-year term ends in July 2016. The odds are narrowing on Lagarde, a French lawyer and politician whose pronunciations seldom rise above the humdrum, to be replaced by a more economically savvy candidate from Asia or Latin America. The IMF managing director has traditionally been a European. But the more the developing countries can use the tailwinds in the world economy in their own favor, the greater will be likelihood of a landmark decision that takes account of the international economic shift toward the emerging world.
Marsh is chairman of the Official Monetary and Financial Institutions Forum (OMFIF), a London-based think tank that promotes dialogue between private-sector and public institutions on world finance.