The US is likely to feel the effects of sharply slowing growth elsewhere in the world, the International Monetary Fund’s chief economist has said amid signs of a loss of momentum in a broadening range of economies.
Speaking in an interview with reporters ahead of his retirement from the Fund at the end of the year, Maurice Obstfeld said that he is not expecting a recession in the US, but he expects growth to progressively slow in 2019 and 2020 as the effect of tax cuts and spending hikes diminishes.
“For the rest of the world there seems to be some air coming out of the balloon. That will come back and also affect the US,” he predicted.
Worries about drooping growth in Asia and Europe have started to impact the US policy outlook, even as the Federal Reserve prepares for a likely increase in short-term interest rates later this month. While the US unemployment rate is hovering at its lowest since the 1960s, gauges of manufacturing growth drifted lower in November in countries including Germany, France, Italy, Japan and South Korea, while in China measures of export orders have fallen into contraction territory.
Federal Reserve policymakers have been discussing swelling “downside” risks to the largely positive US performance. Among them are the overseas deceleration, turbulent financial markets, and continued fears over the US’s trade war with China. Mr Obstfeld highlighted weaker third-quarter data within a number of Asian economies, as well as setbacks to Europe’s growth story including a decline in third-quarter output in Germany.
Mr Obstfeld stressed that he was still expecting an above-potential expansion for the US next year. The “nightmare scenario” would be that inflation picks up strongly in the US, and the Fed responds with high interest rates just as fiscal policy goes into reverse.
“If anything what we are seeing from what the Fed is saying and from market expectations, is expectations for a more moderate pace of interest rate increases than we would have thought a couple of months ago,” he said.
Mr Obstfeld, who will be succeeded by Harvard professor Gita Gopinath, joined the IMF in 2015, at a time when he said the institutions of “multilateralism” were basically unquestioned. The arrival of Donald Trump as US president has changed that. “There is a more conflictual approach to international economic relations than we had seen,” he said. “That is a really big change.”
With trade tensions between China and the US still running high despite the apparent detente at the G20, Mr Obstfeld said it was important to “entice” China into a global framework that sees Beijing changing some of its trading practices alongside accommodation by other countries of its “legitimate economic goals.”
There is “significant room” for China to open up further and give markets a bigger role to enhance growth and stability, as well as boosting currency flexibility, he added. It may well be in China’s interest to open up to greater foreign investment and reform its intellectual property regime, which is the centre of complaints by Western nations.
“Embedding them into the multilateral system is actually in everyone’s interest,” he said. “I don’t think conflict is really going to be helpful in that evolution.”
Mr Obstfeld pushed back against the notion the world was heading for an outright reversal of the globalisation that has reshaped the global economy.
“We are not really in my view going to go back to conditions of the Great Depression where trade absolutely collapsed under the pressure of trade restrictions,” he said. “I see the tensions now as being possibly damaging because so much of global investment and production is tied up in trade, but not liable to the kind of collapse we saw in the 1930s.”