Has the global expansion weathered too many hits?
By Daniel Moss
AT WHAT POINT will the five-year-old expansion be dealt one punch too many? It may well make it through this latest scrape 鈥 and emerge in weaker shape. Top economic officials will earn their pay.
The Iran War will certainly extract a toll. The difficulty lies in figuring out whether it represents just another setback or finally quashes the resilience that鈥檚 come to typify growth since the pandemic. This tension was evident at last week鈥檚 meetings of the International Monetary Fund (IMF) in Washington. It鈥檚 encouraging to hear prudent noises from policymakers, but caution risks becoming an excuse for not doing anything. That can be smart in the short term. It鈥檚 not a sustainable strategy.
The Middle East confrontation accentuates debate about the post-COVID lessons that central banks learned. Do they look through the oil-price shock following the eruption of hostilities on Feb. 28, or do they begin clamping down on inflation before it builds? The latter risks adding additional burdens to businesses and consumers.
Assuming inflation is temporary, a trap similar to the one they fell into in 2021, hints at confidence that may not be warranted. Huw Pill, chief economist at the Bank of England, nailed the shortcomings of this approach: 鈥淚鈥檓 is necessarily the appropriate response to the sort of inflationary dynamics which have the potential at least to have some self-sustaining momentum,鈥 he said at an event on Friday.
The impact of the conflict on the global economy doesn鈥檛 appear disastrous. The IMF will slip to 3.1% this year, down from a January forecast of 3.3%. Not bad, considering the massive disruption in energy markets. But it would be wrong to treat these numbers with comfort. The fund warned that for every day that energy supplies are disrupted, the more we drift toward a less benign outcome.
Rapid rate hikes after COVID, and US tariffs were big negatives. Neither undid the expansion, nor have US President Donald Trump鈥檚 reckless efforts to undermine the autonomy of the Federal Reserve, the institution that, more than any other, underwrites world financial stability. And investors haven鈥檛 dumped US assets en masse or stampeded away from the dollar after the US unveiled tariffs a year ago.
But scratch beneath the main forecasts today and the outlook is worrying. The IMF also outlined two . One sees growth sliding to around 2.5% and inflation rising to 5.4%. The worst sequence, which the institution calls 鈥渟evere,鈥 may induce recession; growth would slip to about 2% while inflation would pick up to around 6%. Outright contractions in GDP are extremely rare; they occurred in 2020, during the worst stage of COVID, and in 2009 in the wake of the subprime collapse. That suggests conditions won鈥檛 become too terrible, absent a significant escalation in fighting 鈥 or a major policy error.
As ever, the world finds itself dependent on a handful of big economies. China got off to a respectable start 鈥 GDP rose 5% in the first quarter from a year earlier, and suggesting limited spillovers from the war. Domestic engines are struggling, however, as retail sales continue to disappoint and unemployment remains elevated. The US may keep a slump at bay, with job creation still strong. But it would be a mistake to rely too heavily on these two giants.
Perhaps looking for an end to the expansion isn鈥檛 the point. However, the foundations are under threat. Without the war, an upgrade to forecasts would have been deserved. The best that can be said is that the global economy faces the conflict in as good place as could be hoped. If only the self-inflicted wounds ceased coming.
BLOOMBERG OPINION
