It’s the Global Economy, Stupid!

The following is a guest post by Terrence Mullan, assistant director for international institutions and global governance at the Council on Foreign Relations.

The heads of the leading global think tanks that comprise the Council of Councils (CoC) ranked managing the global economy as the second highest priority for policymakers in 2019, up significantly from sixth in 2018. Survey respondents were troubled by stalling global economic growth, rising inequality, rampant uncertainty, and insufficient macroeconomic coordination.

Almost needless to say, think tank leaders were also concerned with President Donald J. Trump’s unilateral economic brinkmanship. Trump’s repeated weaponization of tariffs—threats included—are precursors to global financial volatility, reductions in cross-border investment, and slower economic growth worldwide, not to mention needless economic pain inflicted on U.S. businesses and consumers.

Rohinton Medhora, president of the Centre for International Governance Innovation (Canada), lamented that “it would be a stretch to suggest that the global economic system is being managed” at all. In some areas, “it is being willfully mismanaged.” Xue Lei of the Shanghai Institutes for International Studies added that enduring global economic coordination “is still only wishful thinking.”

While the global economy was fairly stable in 2018, Elizabeth Sidiropoulos of the South African Institute of International Affairs said that the world’s performance in managing it “sowed the seeds of greater uncertainty and instability in 2019.”  Many think tank leaders feared that emerging downside risks and new vulnerabilities portend a global recession at a time when the majority of economic powers do not have the capacity to stimulate their economies.

The Global Economy Muddles Along in 2018

The CoC Report Card on International Cooperation awarded international efforts to manage the global economy a C+ in 2018, down from the B– awarded in 2017. Global growth in 2018 remained steady at 3.7 percent, but was two-tenths of a percentage point lower than projected. Despite higher tariffs on some imports, the U.S. economy expanded by 2.9 percent and the Chinese economy grew by 6.6 percent—the latter’s lowest rate in nearly thirty years.

As the Report Card notes, “ten years after the 2008 financial crisis, global efforts to coordinate economic policy appear muddled.” Leaders in attendance at the Group of Twenty (G20) summit in Argentina skirted contentious issues, such as protectionism and migration, and the Group of Seven meeting in Canada concluded without a joint communique for the first time, as Trump lashed out at allies for perceived unfair trade practices. Adding fuel to the protectionist fires, “economic growth is uneven and does not reach those who need it the most,” writes Yul Sohn of the East Asia Institute.

Prospects for the Global Economy in 2019

Last week, the World Bank predicted “weaker-than-expected” global economic growth of 2.6 percent for 2019. In April, the IMF also cut its global growth forecast, to 3.3 percent in 2019. Both organizations cited substantial risks that could further downgrade growth prospects. These risks include growing uncertainty, rising corporate debt levels, and lower than expected growth in many countries. Most importantly, however, escalating trade tensions—primarily U.S.-China tariffs and the recently threatened U.S. tariffs on Mexico—are hurting growth prospects. The IMF estimates that the U.S.-China tariffs alone could reduce global economic output in 2020 by half a percent, or about $455 billion.

Over the weekend, G20 trade ministers and finance chiefs said trade tensions were a major factor in sluggish growth, but both again omitted long-standing vows to fight protectionism. For years, G20 communiques included explicit anti-protectionist commitments. That commitment has been omitted since last year's G20 summit in Buenos Aires to placate the Trump administration.

“It is perhaps easier to blame trade, but trade is not the only” challenge to the global economy, says Carlos Ivan Simonsen Leal, president of the Getulio Vargas Foundation (Brazil). Yasushi Kudo, president and founder of The Genron NPO (Japan) asserted that the U.S.-China clash goes beyond trade, and that increasing great power competition between the two could disrupt global supply chains and the underlying economic system.

“While a global recession still looks unlikely in 2019, the potential triggers are multiplying,” according to Adam Ward of Chatham House (United Kingdom). Central banks are taking notice, attempting to reverse economic slowdowns and boost growth. In just the last week, the Reserve Bank of India cut its benchmark interest rate to its lowest level since 2010 and the European Central Bank floated the idea of preparing additional rate cuts and renewing bond purchases.

The global trend is tending toward looser monetary policy. This is worrying because should a global recession hit, central banks would have less available options in their monetary policy toolkit to protect their domestic economies. Higher federal government debt is also worrying because “should another global economic crisis start, less fiscal room and social capital in and among countries” exists to counteract a downturn, writes Medhora.

Furthermore, the “overall shift from multilateralism to bilateralism bodes ill for the globe’s capacity to respond to an economic or financial crisis as global crises demand swift multilateral coordination,” says Memduh Karakullukcu of the Global Relations Forum (Turkey). “The world lost muscle mass in multilateral economic coordination” that it “could desperately need” down the road.

Recommendations

The most common recommendations involved resolving trade tensions and modernizing the global trading system, which a previous Report Card blog covered. Current economic bickering goes beyond trade, however, and “national governments and international institutions should begin thinking about how to design an off-ramp from beggar-thy-neighbor economic policies and how to motivate the efforts of all countries to improve the currently shaky multilateral framework,” suggests Kudo.

Other recommendations varied from creating a global sovereign debt resolution regime to lowering alarmingly high public debts to increasing policy coordination at the G20. Michael Fullilove, president of the Lowy Institute (Australia) contended that “a significant push by China toward openness would help to reduce multiple tensions and seems to be a necessary component to improving global economic cooperation.”

Many think tank leaders called on international institutions to give greater voice to developing countries. “More fair and equal opportunities in the selection of leadership and voting power in the old-fashioned Bretton Woods Institutions” is needed, according to Xue. With the Global South’s growing economic heft and power, reforms to make Western-dominated global economic governance arrangements more equitable are necessary to keep the relevant multilateral institutions credible, legitimate, and effective.

About the CoC Report Card

The Council of Councils (CoC) Report Card on International Cooperation evaluates multilateral efforts to address ten of the world’s most pressing global challenges, from countering transnational terrorism to advancing global health. No country can confront these issues better on its own; on the contrary, combating the threats, managing the risks, and exploiting the opportunities presented by globalization all require international cooperation. To help policymakers around the world prioritize among these challenges, the CoC Report Card on International Cooperation surveyed the Council of Councils, a network of twenty-eight foreign policy institutes around the world between December 2018 and January 2019.

View the full CoC Report Card on International Cooperation to see how global think tank leaders graded the world’s performance and prospects for 2019 on ten global challenges.

Other CoC Report Card Blogs

Don’t Show the Parents: The 2018–2019 Report Card on International Cooperation

Trump’s Trade War Unimportant in Grand Scheme of Things

Climate Change and the Global Economy Should be the Top Priorities for Policymakers

It’s the Global Economy, Stupid!

Cyber Governance: More Spam Than Substance?

Iran and Beyond: Interstate Conflict Grows More Palpable

The Fissile State of International Nuclear Cooperation

Development Turns Competitive With Mixed Results

Apathy Continues to Plague Global Health