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"Slower growth, precarious recovery" – the subtitle of the latest edition of the IMF's World Economic Outlook, released this week – is an invaluable attempt to capture the spirit of the century. The question is what politicians can do to accelerate growth and make any recovery sustainable.
In the United States, where the IMF expects a slowdown in the economy, from 2.9% last year to 1.6% in 2024, the Federal Reserve has already announced the end of its two-year interest rate hike cycle. In the euro zone, where growth is expected to slow from 1.8% last year to 1.4% in 2024, according to the IMF, nominal interest rates have been equal to or less than zero in the last three years .
Opportunities for fiscal stimulus seem equally limited. The United States is facing this year a budget deficit of $ 1 million, or 4.5% of GDP. European governments, which have more room for maneuver, seem almost conbadly reluctant to ease budget constraints.
Many investors have turned to emerging markets to expect government action. Here, the prognosis of the IMF is less pessimistic. Although growth in emerging countries is expected to slow down from 4.5% last year to 4.4% in 2019, it also expects a recovery to 4.9% by 2024.
However, the outlook is very diverse, as are the policy response options. In China, the main driver of growth for many other emerging markets, the IMF expects growth growth of 6.6% last year to 5.5% in 2024.
Decision makers in Beijing have already taken the lead and eased credit restrictions. Their action this time is necessarily less important than previous interventions – before growth slows again last year, the government's priority was to reduce insurmountable debt – but many investors l & # 39; 39 were excited.
"People are very focused on that," says Nachu Chockalingam, senior manager of the EM debt portfolio at Hermes Investment Management. "This is one of the things they have taken into account: the government will support the stabilization of the economy."
India is another center of attention that will soon surpbad China in terms of population and is already the fastest growing major emerging economy. The IMF expects growth in this region to rise from 7.1 percent last year to 7.7 percent in 2024. Nevertheless, a change of governor in the central bank eased monetary policy , who was previously falconer. To the surprise of many, the bank has cut interest rates twice this year, raising concerns about its political capture ahead of this month's election.
Few others have the same freedom to act. For Turkey, explains Magdalena Polan, Senior Economist at Legal & General Investment Management, the optimal political response to the marked slowdown in the economic recession would be to flood it with money, preferably financed by the IMF.
But, for the moment at least, this option is not available. "Foreign investors would be scared and you would have another chance to make money," she says. "We are used to V-shaped recessions in Turkey, but with the political options in the state, we see no chance of a quick turnaround."
In a less dramatic way, similar constraints are at work in Mexico, where newly elected Andrés Manuel López Obrador has launched ambitious public projects, although excessive spending has put investment grade credit ratings in jeopardy. The president seems to have shrunk a bit under pressure from ministers and markets, although many investors are waiting to see what direction he will take.
John Paul Smith of EcStrat, an investment advisory firm, mocks the idea that emerging markets can open tax or money taps.
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"The idea that we can all have a fiscal frenzy, or that interest rates are so low that we can all do what we want – it breaks down when we look at countries," says he.
The only country where stimulus measures could be carried out, he said, is Russia – but the government is moving in the opposite direction.
"They have a huge retirement problem and Putin is nothing if it's strategic," he says. "He's looking at demographics."
Indeed, it considers retirement commitments as a common theme limiting policy makers in ES. It is also concerned about the role of parastatals and state-owned enterprises and the fact that many governments use their state's banking sector for off-budget financing. In China, he said, an "unquantifiable" amount of money is being used to bail out local businesses and governments through the back door in order to avoid systemic failures.
If decision makers are actually limited, another solution is that it is a good thing. Randolph Wrighton, CEO of Barrow, Hanley, Mewhinney & Strauss, said that of the 20 emerging markets it covers, 19 have central banks operating under rules, compared to three 20 years ago, and the same number have debt and expenses, up five years 20 years ago.
"I do not think it's in anyone's best interest to try to help their economies," he says. "What they can do is continue to move towards first world policies, with transparency, accountability and rule-based systems."
Yet, while the trend of the past 20 years is clear, though sometimes uneven, it is much less clear that policymakers in the management of the currency economy are on the path to further reform. The IMF may have said it well, after all.
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