Over the weekend, International Monetary Fund Chief Christine Lagarde warned that the world economic outlook has dimmed over the past six months, with bigger downside risks than upside.  The interesting thing is that, while she is being transparent and forward-looking of the IMF’s World Economic Outlook report due on April 15, her proposals for solutions require all of us to think much more globally than we used to.

She said the global economy is going in the wrong direction and calls it, the “New Mediocre” – with weak global growth, no new jobs, no inflation and high debt.

But she believes that the problems can be resolved by policy actions that combine the following three-pronged approach: 

  • structural reforms
  • fiscal policy
  • monetary policy

She called her remarks an “alert,” not an “alarm.” But she warned that time is running out and her three policy actions must be coordinated and applied fast.  

Generally, when a recession hits a country, policy makers tend to harbor more protectionism and gravitate toward more austerity measures. However, when there is a possibility of a global downward economic spiral, these are precisely the wrong policies to pursue, and it is even more important to pursue growth-driven policies now with greater global coordination. This requires boldness and timeliness on the political front. 

First on the structural front, Lagarde asked G20 nations to coordinate efforts to raise global GDP by 2 percent by 2018 rather than over several years. This includes effective changes that add to GDP sooner rather than later, such as:

  • deregulating product and service markets, making it easier to start new firms or expand healthy ones
  • boosting more competition through privatization and encouraging free trade so that businesses can attract investments
  • reforming labor markets –rather than firing people, retrain them and encourage labor mobility from dying sectors to more efficient ones. 

While these measures may mean spending more money, the benefit will ultimately save the governments money in the long term.

The second prong of Lagarde’s suggested fiscal policies refers to how to encourage more growth. This means spending government money on infrastructure investments rather than innovation investments, the latter of which would take longer to bear results.

The last prong of Lagarde’s strategy – monetary policy – has already demonstrated growth in the EU and the US. However, it needs additional support from fiscal and structural policies, and cannot be the only reliable policy source any longer. Continued financial oversight to provide a healthy financial market will be crucial for economic growth.

My View:  In today’s unprecedentedly anemic global economy, policy makers and politicians must be held to a much higher standard when it comes to their understanding of the global framework. And they must work in greater coordination with the rest of the world, rather than in isolation. If each country becomes more protective, I believe we are heading in the wrong direction.  We need to think bigger – think global!

The information in this report was compiled by the staff at City National Bank from data and sources believed to be reliable but City National Bank makes no representation as to the accuracy or completeness of the information. The opinions expressed, together with any estimate or projection given, constitute the judgment of the author as of the date of the report. City National Bank has no obligation to update, modify or amend this report or to otherwise notify a reader in the event any information stated, opinion expressed, matter discussed, estimate or projection changes or is determined to be inaccurate. This report is intended to be a source of general information. It is not to be construed as an offer, or solicitation of an offer, to buy or sell any financial instrument. It should not be relied upon as specific investment advice directed to the reader’s specific investment objectives. Any financial instrument discussed in this report may not be suitable for the reader. Each reader must make his or her own investment decision, using an independent advisor if prudent, based on his or her own investment objective and financial situation. Prices and availability of financial instruments are subject to change without notice. Financial instruments denominated in a foreign currency are subject to exchange rate risk in addition to the risk of the investment. City National Bank (and its clients or associated persons) may, at times, engage in transactions in a manner inconsistent with this report and, with respect to particular securities and financial instruments discussed, may buy from or sell to clients or others on a principal basis. Past performance is not necessarily an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.