It’s no secret that the global economy is still limping along, supported on one side by accommodative monetary policies and threatened on the other by financial shocks.
The recovery in the United States, for example, has meandered, at best, through what former Treasury Secretary Larry Summers warned could be secular stagnation — a prolonged state of depressed economic activity. U.S. gross domestic product is more than 10 percent below where the Congressional Budget Office projected it would be before the financial crisis toppled the economy, and the Chicago Fed National Activity Index, an alternative measure of economic activity, rolled into negative territory in February, suggesting below-trend growth. As far as reaching top speed is concerned, the U.S. economy may be short a gear.
In Japan, the Organization for Economic Co-operation and Development (OECD) is projecting GDP contraction of 0.1 percent in 2014, despite the best efforts of Prime Minister Shinzo Abe and his aggressive stimulus programs. In China, Premier Li Keqiang cautioned that “we are going to confront serious challenges this year and some challenges may be even more complex,” and warned investors that there may be bankruptcies at Chinese businesses.
In Europe, the situation is perhaps most dire. Euro area unemployment remained at 11.9 percent in February, down just 0.1 percentage point on the year. In the broader EU28 region, headline unemployment was 10.8 percent, down 0.3 percentage points from last year. That makes nearly 26 million unemployed persons in the EU28 and nearly 19 million in the EU18, and unemployment rates in Greece and Spain remained above 25 percent.
“The outlook is a bit less positive than it was six months ago,” said Pier Carlo Padoan, deputy secretary-general and chief economist at the OECD. The OECD identified numerous significant risks to global economic growth in its recent economic outlook. Chief among them is a slowdown in emerging economies, a headwind compounded by tightening financial conditions. This slowdown could “complicate” the recovery in more advanced economies in Europe.
This is one of the reasons why Christine Lagarde, managing director of the International Monetary Fund, argues that now more than ever the world needs strong, global monetary, financial, and economic stabilizing institutions like the IMF. Speaking with PBS on Wednesday, Lagarde explained.
“Our job is to help stability around the world, financial stability and international cooperation… financial stability around the world is key for all economies. If there’s not a solid IMF to lend in Ukraine, in Mali, in Pakistan, to put in place the economic program, to support the authorities, and to lend money in a sustainable way, then that’s a major tool that the American leadership cannot use in any shape or form.”
Lagarde was speaking directly in response to a question about the U.S. Congress voting to approve an aid package to Ukraine, but did not vote to push forward reforms proposed by the IMF. These reforms would have increased the amount of money supplied to the IMF by its members — including the U.S. — as well as reformed the way in which emerging economies are represented in the organization. Opposition to the reforms was championed by groups like the Heritage Foundation.