Slow growth in the world economy? It doesn't have to be this way

Economic growth is expected to improve between 2019 and 2020. But with nearly 70 per cent of growth dependent on growth in the closely watched emerging markets and developing economies, global growth is subject to high levels of uncertainty.

Global growth is slow and erratic, but it doesn't have to be, because it is partly self-inflicted. Global economic dynamism has been affected by prolonged policy uncertainty, rising trade tensions despite a recent trade truce between China and the United States, technology tensions that have threatened global technology supply chains, and the growing possibility of a no-deal Brexit from the United Kingdom.

The negative consequences of policy uncertainty can be seen in diverging trends in manufacturing and services, as well as in severely weak global trade. Purchasing managers' indices for the manufacturing sector have continued to fall, while business confidence has been falling as firms pause investment in the face of high uncertainty. Growth in global trade, which is closely linked to investment, slowed sharply to 0.5 per cent year-on-year in the first quarter of 2019, the slowest pace since 2012. On the other hand, unemployment in some countries is at record lows, wages are rising and the service sector is doing well, so consumer confidence is growing.

Advanced economies such as the US, Japan, the UK and the eurozone grew faster than expected in the first quarter of 2019. But some of the factors behind this, such as the strong inventory build, are temporary and are expected to see less momentum going forward, especially in countries dependent on external demand. We raised our growth forecasts in the first quarter, particularly for the US, and we raised our 2019 growth forecast for advanced economies slightly by 0.1 percentage point to 1.9 per cent. Looking ahead, growth is expected to slow to 1.7 per cent as the effects of the US fiscal stimulus fade, weak productivity growth and ageing populations weaken the long-term prospects of advanced economies.

For commodity exporters, despite the recent strength in oil prices, supply disruptions in Russia and Chile, as well as sanctions on Iran, have pushed prices lower. Growth in emerging market and developing economies is expected to recover in 2019 and 2020, depending on whether hard-pressed economies such as Argentina, Turkey, Iran and Venezuela can achieve growth, so these economies' growth will remain subject to significant uncertainty.

Increasing downside risk

The global economy remains at a delicate juncture as global growth slows and downside risks dominate the outlook. It is therefore important that tariffs are not used as a general tool to balance bilateral trade or to resolve international differences. To resolve conflicts, the rules-based multilateral trading system should be strengthened and modernized to cover areas such as digital services, subsidies and technology transfer.

Policies to support economic growth

Keep monetary policy accommodative, especially if inflation is below target. But at the same time, it needs to go hand in hand with sound trade policies that will boost the economic outlook and reduce downside risks. With persistently low interest rates, macroprudential tools should be deployed to ensure that financial risks do not build up.

Fiscal policies should balance issues of growth, equity and sustainability and protect the most vulnerable in society. Countries with fiscal space should invest in physical and social infrastructure to enhance economic growth potential. In the event of a severe downturn, monetary easing should be offset by looser fiscal policy in tandem, depending on the country's circumstances.

Finally, there is an urgent need to strengthen global cooperation. In addition to addressing trade and technology tensions, countries need to work together to address major issues such as climate change, international taxation, corruption, cybersecurity, and the opportunities and challenges posed by emerging digital payment technologies.