G20: Step Up to Boost Inclusive Growth

Christine Lagarde, Managing Director of the International Monetary Fund (IMF)

November 29, 2018

Christine Lagarde

Executive Summary

The global expansion continues, but it has become more uneven and there are signs that growth may be moderating. The October World Economic Outlook (WEO) projected global growth to continue at a high level through 2019. However, for many G-20 economies growth was expected to weaken, reflecting the maturing business cycle in most advanced economies, the expected unwinding of the fiscal stimulus in the United States, and the continuing rebalancing of the Chinese economy. Recent data suggests that this deceleration could be faster than expected under the baseline, as financial conditions have tightened especially in emerging markets and trade tensions have increased, prompting policy easing in some countries (e.g., China). Many emerging markets have reacted to rising external pressures by deploying a variety of measures, including policy rate hikes, foreign exchange interventions, and import tariffs. Core inflation pressures remain low across most of the G-20 despite narrowing output gaps.

Downside risks have risen. Financial conditions in advanced economies are still accommodative but could worsen abruptly—for example, due to a more drastic drop in equity markets or faster-than-expected U.S. monetary policy tightening should procyclical fiscal policy lead to a surprise increase in inflation. This would likely add to the pressure on emerging markets and highly leveraged advanced economies (e.g., Italy), as would a worsening of risk sentiment. A further escalation of trade tensions could dent confidence and trigger more substantial output losses, as could uncertainty around a Brexit deal in Europe. The lack of policy space would amplify the impact of these risks.

Progress toward the G-20 goals of more balanced, sustainable, and inclusive growth remains slow.* External imbalances could further increase given the combination of U.S. fiscal expansion and limited fiscal and demand-enhancing structural policies in some advanced excess surplus economies (e.g., Germany), raising the possibility of a disorderly adjustment later. Renewed policy loosening in China could slow domestic rebalancing. At the same time, financial vulnerabilities have increased across the G-20, with high and rising debt among many non-financial corporates, households and sovereigns. Slow productivity growth—linked, in part, to population aging—continues to dim medium-term prospects. Progress toward more inclusive growth has been slow, which could undermine support for necessary structural reforms.

Working together, policymakers can contain risks, strengthen the global expansion over the medium term, and ensure the benefits of growth are widely shared. This requires decisive action to:

  • Reduce vulnerabilities. High-debt sovereigns need fiscal consolidation to rebuild buffers and procyclical expansions should be reversed. Monetary normalization in advanced economies should continue in a well-communicated, gradual, and data-driven manner. Emerging economies with well-anchored inflation targets should rely on exchange rate flexibility to mitigate external pressures and avoid tariffs or other policies that may weaken market confidence. Where pressures threaten to be disruptive, capital flow management measures could have a role to play as part of a broader policy package addressing vulnerabilities and strengthening policy frameworks.
  • Renew multilateral cooperation. There is an urgent need to de-escalate trade tensions, reverse recent tariff increases, and to modernize the global trading system, including by reducing barriers to trade in services. Cooperation is also necessary to bring down external imbalances, avoid rollback of post-crisis advances in financial sector regulation, coordinate support for low-income countries, and to address other global challenges such as climate risks, and international taxation.
  • Address financial risks. Risks from highly leveraged non-financial sector balance sheets, deteriorating credit quality, and high exposure to foreign currency or foreign-owned debt in several emerging economies call for action, including the proactive use of micro- and macroprudential tools.
  • Boost balanced, sustainable, and inclusive growth. Avoiding procyclical fiscal policies in deficit countries, using fiscal space to lift potential output in excess surplus countries, and policies to reduce excess saving will help narrow excess external imbalances and keep domestic vulnerabilities in check. Jointly undertaking structural reforms would add 4 percent to global real GDP in the long term. Depending on country needs, investment in human capital—for example, through education—in combination with strong social safety nets, appropriate fiscal redistribution and access to health care are key to preparing for the future of work and ensuring that the benefits of growth are widely shared.

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