Preventing further slowdowns: Addressing income inequality

On January 21, 2019, the International Monetary Fund (IMF) adjusted its world economic growth forecasts for the year 2019 and 2020 as they detected weakness in economies of Europe and some emerging countries across the globe. The IMF said that failure to resolve trade tensions could further destabilise a slowing global economy. The global lender also cited a bigger-than-expected slowdown in China's economy in its second downgrade in three months. A possible "No Deal" Brexit will further aggravate turbulence in financial markets.

The IMF has predicted that the global economy will grow at 3.5 per cent in 2019 and 3.6 per cent in 2020-down by 0.2 and 0.1 percentage points respectively from October 2018 forecasts. As a result, policymakers would need to come up with plans that will address the sudden stop in years of solid global growth. In an update to its World Economic Outlook report, the IMF said that an escalation of trade tensions beyond those already incorporated in the forecast remains a key source of risk to the outlook. Increased trade policy uncertainties and concerns over escalation and retaliation would lower business investment, disrupt supply chains and slow productivity growth. The resulting depressed outlook for corporate profitability could dent financial market sentiments and further dampen growth.

Besides the US-China trade war impasse and the Brexit issue in UK, Europe is likely to face some problems in the coming months. With its export powerhouse Germany hurt by new fuel emission standards for cars and with Italy under market pressure due to Rome's recent budget standoff with the European Union (EU), the downgrades reflect signs of weakness in Europe. The IMF said that growth in the euro zone is set to fizzle from 1.8 per cent in 2018 to 1.6 percent in 2019, 0.2 percentage points lower than projected three months ago. The IMF also cut its 2019 growth forecast for developing countries to 4.5 per cent, down by 0.2 percentage points from the previous projection and from 4.7 percent in 2018.

Amid global trade tensions, other factors like increasing US interest rates, appreciation of dollar, capital outflows, and volatile oil prices have all been testing emerging markets and developing economies like Bangladesh over the past few months. 

On the other hand, pointing to continued strength in domestic demand, the IMF has kept its earlier US growth projections of 2.5 per cent in 2019 and 1.8 per cent in 2020. It also kept its China growth forecast at 6.2 per cent for both 2019 and 2020. But said economic activity could miss expectations if trade tensions persist. This will remain true even with state efforts to spur growth by boosting fiscal spending and bank lending. Concerns about the health of China's economy can trigger abrupt, wide-reaching sell-offs in financial and commodity markets. This could place trading partners, commodity exporters, and other emerging markets under pressure as was the case in 2015-2016.

Britain is expected to achieve 1.5 per cent growth in 2019. Though there is uncertainty over this projection, which is based on the assumption of an orderly exit from the EU. The rare bright spot was Japan, thanks to an expected boost from its government's spending measures aimed to offset a scheduled sales-tax hike in October 2018. The IMF revised Japan's growth forecast by 0.2 per centage point to 1.1 per cent in 2019.

Christine Lagarde, the IMF managing director, urged countries to "fix the roof while the sun is shining", while stressing that policymakers should carry out structural reforms at a time when the global economy is enjoying solid growth. The IMF has stressed the need to address income inequality and reform the financial sector as well.

However, as growth momentum peaks and risks to the outlook pile on, policymakers now need to work on policies that can prevent further slowdowns. The onus is on countries like USA, China and others to resolve trade tensions by cooperating with each other. Being an emerging economy, Bangladesh's policymakers need to be cautious about global issues that can affect the country's prevailing growth momentum.

Sarwar Md Saifullah Khaled is a retired Professor of Economics, BCS General Education Cadre.

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