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As we approach the end of the year, the International Monetary Fund (IMF) has once again lowered its global growth forecast on the back of a stressed financial system. In its latest World Economic Outlook report, the organization highlights the continued uncertainty surrounding trade tensions, the rapidly spreading fears of recession and the ever-increasing debt levels. This has led to increased market volatility and a widespread loss of investor confidence – a recipe for financial disaster.
The current global environment is perplexing, to say the least, as we witness rising disparity among economies with some showing promise, while others struggle to stay afloat. The IMF has slashed its growth outlook from 3.2% to 3% this year, which is a significant drop from the 3.6% forecast two years ago. These figures, while alarming, reflect the increasingly difficult trading conditions and a much weaker global economy.
Trade tensions continue to be one of the significant driving forces of the current global economic uncertainty. The ongoing trade war between two of the world’s most significant economies, China and the United States, has created a significant dent in the growth outlook for the world economy. In retaliation to the US’s trade sanctions, China imposed tariffs on imported goods from the United States, causing a decrease in American exports over the summer. Although the two superpowers have since agreed to some extent, we are still nowhere near a resolution of the issue. Consequently, the uncertainty created by this tension continues to keep investors on edge, causing market swings.
When coupled with the credit market stresses, the result can be a bursty financial system. The term “bursty” is used in mathematical terminology, referring to a system where data arrives in sporadic or uneven clusters. In simple terms, this pertains to the market volatility or sharp spikes in demand or supply of financial instruments. The continued uncertainty, combined with negative economic data, has been the cause of significant fluctuations in the global financial markets in recent years. The bursty nature of the financial system also derives from the tendency of people and markets to bandwagon on a particular orthodoxy about the market, leading to an exaggerated response even to minor market fluctuations.
Another factor contributing to the IMF’s lowered growth outlook is the rapidly increasing debt levels. Government debt has been mounting globally since the 2008 economic crisis, currently being at the largest-ever nominal amount of $69 trillion, or 83% of GDP. This level of debt has effectively reduced the maneuvering space of governments in addressing economic setbacks, reducing their capacity to react to event shocks. It also highlights how vulnerable the world economy is to a financial crisis.
In this current challenging environment, we must take note of the importance of maintaining monetary and fiscal policies to build trust and anchor inflation. Monetary authorities should continue to remain vigilant, while at the same time keeping the interest rates at reasonable levels, to encourage growth while preserving financial stability. The strengthening of financial regulation has become vital in order to mitigate against possible risks from more central-bank accommodation, avoiding unintended spillovers.
There is a need for governments to have an adequate response to the existing trade-induced downturn. We must move to resolve the trade tensions that currently plague us, as they have contributed to the overall drop in economic growth. Therefore, governments must pursue policy actions that would help to reduce the longstanding trade imbalances, restore confidence and create equity in the global economy.
We cannot disregard the critical role of the IMF in ensuring global economic stability. Its consistent calls to action on significant issues such as trade tensions, increased regulation and the need for coordination among governments serve as a beacon for financial stability. The IMF continues to be instrumental in shaping world economic policies, and therefore, must continue to promote international cooperation to address economic risks.
In conclusion, while it may be tempting to blame external economic factors for the current global economic issues, we must not forget that governments have an essential role to play in ensuring economic stability. The IMF alarmingly lowered its growth outlook amid the current market uncertainty, trade tensions and rapidly increasing debt levels. Central banks should avoid spur-of-the-moment decisions that would further heighten market uncertainty, and governments should pursue policies that would build investor confidence, create equity and restore growth.
