IMF Sees a Global Boom That's Overly Dependent on Easy Money

By Greg Ip Features Dow Jones Newswires

DAVOS, Switzerland -- The world is enjoying its broadest, strongest growth in years, and everyone has an explanation, from the U.S. tax cut to the recovery in oil prices.

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But for the International Monetary Fund, the answer is rather simple and disturbing: easy monetary policy. In the outlook for the global economy released in Davos, Switzerland, on Monday, the IMF credited the extremely slow pace of interest-rate increase in the U.S. and still-large balance sheet of the European Central Bank for why it believes the world grew 3.7% in 2017, its best since 2011, and will grow 3.9% this year. Both are up slightly from projections released last October.

Coupled with the booming stock market, that growth has produced some head scratching among the business and political leaders gathered here preoccupied by risks ranging from populism to climate change.

"It is a puzzle," said IMF chief economist Maury Obstfeld. The tax cut explains nearly all the upgrade in the U.S. growth projection next year to 2.7% from 2.3%, and smaller amounts for the U.S.'s trading partners, thus less than half the world's total upward revisions.

True, the tax cut explains some of the stock market's run-up. But Mr. Obstfeld notes, "Stock markets are booming in a lot of countries that have not had tax cuts." Moreover, the regions with the most striking upgrades to their growth outlooks were Europa and Asia, not the U.S.

This leads him to attribute the pickup to central banks' still-highly stimulative monetary policy. This seems odd given that the Federal Reserve has been raising interest rates and several other central banks are preparing to do so. But the fact bond yields had been so low until recently suggests the pace of tightening has still been historically modest.

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One result is extremely high valuations for stocks. At a low enough interest rate, almost any valuation can be justified. But, Mr. Obstfeld noted, that makes the market acutely vulnerable to any shift in perception about interest rates that would hurt valuations. And, he added in a related blog post, "As important as they have been to the recovery, easy financial conditions and fiscal support have also left a legacy of debt."

Mr. Obstfeld warned in the post that the current upturn "is unlikely to become a 'new normal'".

Markets, he said in an interview, "are excessively sure that central banks can solve every problem, and they can't, and they've been telling us they can't. We need fiscal policy, and governments are so indebted now the fiscal space they have is much more limited than a decade ago. They especially need structural policies to raise potential growth rates and deal with inequities challenging political systems right now."

Write to Greg Ip at greg.ip@wsj.com

(END) Dow Jones Newswires

January 23, 2018 05:44 ET (10:44 GMT)