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The Cable

The Cable goes inside the foreign policy machine, from Foggy Bottom to Turtle Bay, the White House to Embassy Row.

Just How Bad Is the Global Economy? It’s All a Matter of Perspective.

The IMF warns the economy could go off the rails. A group of prominent economists want everyone to calm down.

By David Francis

March 8, 2016, 5:24 PM

Is the global economy at risk of coming off the rails, or do investors and policymakers need to take a deep breath and calm down about its health? It depends who you ask.

On Tuesday in Washington, D.C., David Lipton, the deputy managing director at the International Monetary Fund, warned the world’s economy is “clearly at a delicate juncture” and that there is a growing “risk of economic derailment.” His comments came as China reported its worst monthly drop in exports since 2009, the latest sign of a broader slowdown in the world’s second-largest economy. Lipton also cited concerns about slowdowns in Russia and Brazil.

“Now is the time to decisively support economic activity and put the global economy on a sounder footing,” Lipton told the National Association for Business Economics, calling for pro-growth financial policies and changes to monetary policy to stimulate growth.

He added that he is especially concerned about “a sharp retrenchment in global capital and trade flows,” reflected in data released by China Tuesday. Beijing’s exports fell 25.4 percent in February from a year previous. Imports also fell 13.8 percent month to month, a sign that Chinese consumers were cutting back on spending.

Lipton wasn’t alone with his dire forecast. On Tuesday, the Organization for Economic Cooperation and Development, an international economic alliance of 34 countries, said signs of slowing growth are visible in the United Kingdom, the United States, Canada, Germany, and Japan.

Not everyone was quite so pessimistic. The Peterson Institute for International Economics, led by Olivier Blanchard, former chief economist of the IMF, and Adam Posen, a former member of the Bank of England’s monetary policy committee, released a paper Tuesday that called for a “reality check” and said that irrational pessimism about the direction of it could lead to a “needless, preventable recession.”

“The immediate costs of such a self-inflicted wound would be devastating for those just recently reemployed and the many still under- and unemployed, corrosive of confidence in policymakers’ ability to stabilize economies, and could further feed the ugly illiberal politics that has emerged in Europe and the United States,” Posen wrote.

The paper goes on to argue that low oil prices are good for the U.S. economy; China is still growing; U.S. equities are set to continue to gain value; and that central banks around the world have tools to stimulate economic activity.

“Greater confidence in the world economy’s resilience and near-term prospects is justified,” Posen wrote. “Market fears about the ability of policy to stabilize growth and promote inflation, if understandable, are exaggerated or in some cases unfounded. All the more reason then not to allow ourselves to be distracted by a financial market tail wagging the macroeconomic dog.”

Photo credit: Cris Bouroncle/Getty Images