The IMF is right to worry about problems aheadby George Magnus / October 22, 2018 / Leave a comment
Stock markets don’t always correlate well with what’s going on in the economy, but a largely lacklustre showing this year may well be sending out warning pulses. For the economic and financial community, which had already been speculating that the next recession might be due in 2020, the IMF meeting in Bali last week was a bit of a cold shower. A decade after the financial crisis, the abiding sense from the IMF is that there are plenty of reasons to worry.
In the week ending 11th October, the best of the world’s major markets, the US S&P index, fell by nearly 7 per cent. Most of this happened in two days, marking one of the most volatile periods in the index’s 90-year history. Other markets reacted in similar fashion, but consider that while the S&P is still up 3.5 per cent this year, the FTSE 100 is down over 8 per cent, the 600 firms in the broad Eurostoxx index are down 7 per cent, the Nikkei is off 1 per cent, and the Chinese Shanghai Composite index is already in a bear market, having fallen 24 per cent. Markets have been skittish indeed.
As this global expansion gets ever longer—and if America’s keeps going until June next year, it’ll be the longest since records began in 1854—the IMF is worried about the financial consequences, in combination with rising oil prices, a concentration of debt risks, especially in China, and, inevitably, the politics of trade conflict.
Brent oil at around $80 a barrel is at its highest level since 2014, and up 17.5 per cent since January. Global demand is firm, but supply constraints are tightening the market: OPEC discipline is keeping a lid on output, new sanctions on Iran are biting, and so are bottlenecks in US shale oil production. Some market watchers think prices could top $100 next year. One thing that has led every global downturn for the last 40 years has been a trend of rising oil prices.
In the US, a moderate economic expansion has been turbo-charged by totally unnecessary tax cuts that will boost the Federal fiscal deficit by 20 per cent in 2019 to just below $1 trillion, or roughly 5 per cent of GDP. Moreover, with inflation…