Home Economy IMF Warns World “Dangerously Unprepared” For Upcoming Global Recession

IMF Warns World “Dangerously Unprepared” For Upcoming Global Recession

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In the starkest warning yet about the upcoming global recession, which some believe will hit in late 2019 or 2020 at the latest, the IMF warned that the leaders of the world’s largest countries are “dangerously unprepared” for the consequences of a serious global slowdown. The IMF’s chief concern: much of the ammunition to fight a slowdown has been exhausted and governments will find it hard to use fiscal or monetary measures to offset the next recession, while the system of cross-border support mechanisms — such as central bank swap lines — has been undermined, warned David Lipton, first deputy managing director of the IMF.

“The next recession is somewhere over the horizon, and we are less prepared to deal with that than we should be . . . [and] less prepared than in the last [crisis in 2008],” Lipton told the Financial Times during the annual meeting of the American Economic Association. “Given this, countries should be paying attention to keeping their economy on a level trajectory, building buffers and not fighting with each other.”

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While the IMF projected solid, 3.7% growth in the global economy in 2019 in its most recent, October, forecasts, with the IMF set to release updated forecasts later this month, Lipton admitted that the growth outlook is being undermined by trade tensions, policy flaws and weakness in Asia.

“China is clearly slowing down — we think China’s growth has to slow, but keeping it from slowing in a dangerous way is an important objective,” he said, noting that a downshift would be “material very broadly, not just in Asia.”

Countering the IMF’s gloom, at the same conference, White House economic advisor Larry Kudlow, said that “there’s no recession in sight.” He urged economists to ignore the swings on Wall Street, even as many traders and some leading economists have pointed out that the new gloomy investor “narrative” could become self-reinforcing amid a renewed debate if the market leads the economy or vice versa. “Suddenly, the markets are reacting as if there’s a crisis of interest rate increases,” argued Yale professor Robert Shiller.

He pointed out that, although the Fed had been raising rates for several years, investors were only reacting to this now: “This doesn’t look rational,” he says, drawing parallels with the 1920s in terms of the sudden shift in psychology. “[Then] the earnings were high, the economy was moving well, but suddenly it crashed — and again it was talk, I think. There was a new narrative that developed in 1929, just as there is a new narrative developing today.”

With the latest round of US-China trade negotiations starting today, the Atlanta conference revealed widespread pessimism among economists about the chance of any rapid resolution to the current trade wars.

“It is always possible that President Trump can wake up one day, reach out to his friend President Xi and decide to take yes for an answer”, said Adam Posen, president of the Peterson Institute for International Economics.

“But, given the host of issues that the US government is raising, some of which are legitimate, some of which are exaggerated, and some of which are crazy, it’s very hard to get to yes,” Posen said. He added that the Trump administration has hinged reconciliation of the trade war on issues which “may require a wholesale change in the Chinese system.”

That is unlikely to happen in the near future.

Meanwhile, the IMF’s Lipton argued that rising protectionism showed that governments urgently needed to develop better policies to help their populations adapt to global competition. However, the FT notes, “the magnitude of this challenge was illustrated by a range of economic research presented in Atlanta which showed that global trade competition is having a very uneven impact on the American work force, stoking inequality.”

Separately, MIT labor economist David Autor gave a speech in which he showed that rural workers in the US who fail to move to cities to find work may be making a rational decision because, without a college degree, higher-wage jobs in cities have become scarce. Instead, the main growth in lower-wage jobs is coming from what Autor calls “wealth work” — jobs such as baristas and animal therapists that serve the wealthy, something we have claimed for years (see “An Update On The Waiter And Bartender Recovery“).

“It’s a good time to be young and educated,” he concluded, but there are few good choices for low-skilled older workers.

Finally, economists from Stanford, Colorado and Michigan universities presented research which showed that trade competition with China is mostly hitting “low human-capital zones” in the south and west of America, in a manner which “exacerbates the potential inequality caused by the China shock.”

via zerohedge

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