Fragile and delicate. The adjectives said it all. The mood at the spring meeting of the International Monetary Fund and the World Bank was sombre. The global economy has weakened in the past six months and the Fund thinks the risks are skewed to the downside.
The caution is justified, even though in some respects the outlook is less gloomy than the Fund suggests. For a start, there are some tentative signs that activity has bottomed out. The removal of the threat of higher interest rates from central banks has provided a boost to confidence. A substantial package of tax cuts and spending increases has arrested the growth deceleration in China. Two of the threats highlighted by the IMF in its world economic outlook – a full-blown trade war between China and the US, and a disruptive Brexit – look less serious than they did a month ago.
The IMF has some extremely smart economists but its short-term forecasting record is not impressive. It is possible things will turn out better than it expects.
So why the uncertain mood? There are three big reasons, worth looking at in ascending order of importance.
First, the finance ministers and central bank governors who gathered in Washington know that they lack policy space if things go wrong. There is a sense – quite justified – that measures taken to stave off recessionary pressures now will simply lead to even bigger problems later.