Get used to limping

The International Monetary Fund (IMF) is holding this year's annual general meeting in Marrakesh, Morocco. To coincide with that it published its latest World Economic Outlook, titled 'Navigating Global Divergences', which wins this year's gold medal for euphemism. We are living in a world not so much of divergence as destruction. The WEO asserts that a "resilient global economy" is "still limping along, with growing divergences". The WEO is one of those reports that, by the time it appears is always out of date, but coming from one of the few objective global monitors cannot be ignored. Immense amounts of money - not to speak of lives - are daily being frittered away in big conflicts in Gaza, Myanmar, Syria, Sudan, Ukraine, while smaller (and not much less wasteful) conflicts are to be found on almost every continent. Many trillions of Dollars or their equivalent have disappeared or are about to out of the barrel of a gun. As John Maynard Keynes wrote in A Tract on Monetary Reform in 1923, "what a government spends the public pay for. There is no such thing as an uncovered deficit."

Spending slowdown

The public will foot the bill for all this global conflict; the trouble is it can less and less afford to do so. The pot is running low. According to this WEO global output in 2023 will be about 3% lower than was expected prior to the Covid-19 pandemic. By 2028 global gross domestic product (GDP) growth will struggle to be 3% says the WEO. Global shocks reverberate long after their technical conclusion - there has been, says the WEO, a 1.9 percentage decline in medium-term global growth prospects since 2008, the year of the Great Financial Crash. The global economy has been regularly battered since the start of the new millennium. The financial crash, the massive expansion Covid-19, war in the Ukraine, fossil fuel price spikes, high inflation...all have done their bit to destroy the prospects of a gradual global enrichment. And now we face the rush towards achieving net-zero greenhouse gas emissions, which although laudable will nevertheless impose massive costs, about which there is little consensus; McKinsey, the consulting firm, has put the necessary spending on physical assets to energy and land-use systems in the transition to net-zero at more than $9 trillion (£7 trillion) a year out to 2050. We are between a rock and a hard place - such higher costs are running into shrinking bases from which the necessary taxes can be extracted. For example the World Health Organization (WHO) said this week that, in Europe, covering 53 countries, the number of people aged 65 and older - i. e. retirees - will outnumber that under-15s next year. All those non-working pensioners wanting to be supported as they steadily get sicker, cost more...

Of more immediate concern perhaps is how the US economy is faring. On that score it's starting to look as though the relatively high interest rates, of 5.25-5.5%, are biting. Citi, the bank, says that credit card spending at US retailers fell by almost 11% in September, the fifth successive month of what it calls "spending deceleration". Defaults on loans taken out to fund purchases of automobiles have risen. The robustness of the US consumer, within what has been an unusually strong labour market, has underpinned America's economic resilience. That looks like it is running out of steam. The US Federal Reserve has long been battling stubbornly high inflation and has indicated it may raise interest rates again in November.

More reading

Some of the more hawkish members of the Fed's board may pay attention to a very different paper from the IMF, published last month. Called One Hundred Inflation Shocks: Seven Stylized Facts, it studies 111 inflationary episodes. Among its conclusions are that inflation only returned to pre-shock levels after one year in a shockingly few (12 out of 111) cases; in 47 cases it didn't return to normal after five years - on average inflation didn't return to pre-shock conditions for three years. Moreover, those fights against inflation were most successful when central banks raised interest rates and kept them higher for longer. The WEO said that inflation in the UK will this year average 7.7%, the highest in the G7 group of advanced economies, falling to 3.7% next year; in the US inflation will be 4.1% this year and drop to 2.8% in 2024. In both the inflation 'target' is 2%/year.

There still seems resistance among some politicians/central bankers/economists to the idea that our current inflation is fundamentally the result of a rapid increase in the quantity of money sloshing around in our economy. By mid-2022 the Fed increased US money supply by some 40%. The Quantitative Easing (QE) - increased money supply - that many central banks indulged in immediately after the 2008 financial crash similarly fed inflation and prevented many defunct businesses from going under. Pain delayed is just pain postponed; that's one big reason why the global growth outlook is so poor.