Policy-making elites converge on Washington this week for meetings that epitomise a faith in globalisation that's at odds with the growing backlash against the inequities it creates.
From Britain's vote to leave the European Union to Donald Trump's championing of "America First," pressures are mounting to roll back the economic integration that has been a hallmark of gatherings of the IMF and World Bank for more than 70 years.
Fed by stagnant wages and diminishing job security, the populist uprising threatens to depress a world economy that International Monetary Fund Managing Director Christine Lagarde says is already "weak and fragile."
The calls for less integration and more trade barriers also pose risks for elevated financial markets that remain susceptible to sudden swings in investor sentiment, as underscored by recent jitters over Frankfurt-based Deutsche Bank's financial health.
"The backlash against globalisation is manifesting itself in increased nationalistic sentiment, against the outside world and in favour of increasing isolation," said Louis Kuijs, head of Asia economics at Oxford Economics in Hong Kong and a former IMF official. "If we lose consensus on what kind of a world we want to have, the world will probably be worse off."
Lagarde said last week that policy makers attending the October 7-9 annual meeting of the IMF and World Bank have two tasks. First, do no harm, which above all means resisting the temptation to throw up protectionist barriers to trade. And second, take action to boost lacklustre global growth and make it more inclusive.
Achieving even those modest objectives may prove elusive. Free trade has become polling poison in the US presidential campaign, with Democratic nominee Hillary Clinton now criticising a trade deal with Pacific nations, which isn't yet ratified in the US, that she had praised when it was being negotiated. Republican challenger Trump has lashed out at Mexico and China, threatening to slap big tariffs on imports from both nations.
Rattled by the UK's June vote to leave the EU, European leaders know it may just be the start of a political earthquake that's threatening the continent's old certainties. Next year sees elections in Germany and France, the euro area's two largest economies, and in the Netherlands. In all three countries anti-establishment forces are gaining ground.
With growing resentment of the EU from Budapest to Madrid, policymakers have described the current surge in populism as the greatest threat to the bloc since its creation out of the ashes of World War II.
There are also growing signs that the union and Britain are heading for a so-called "hard exit" that would sharply reduce the bloc's trade and financial ties with the island nation. UK Prime Minister Theresa May said on October 2 that she'll begin her country's withdrawal from the EU in the first quarter of next year.
Perhaps the biggest beneficiary of free trade over the past generation, China, still restricts access to many of its key industries, with economists worried about increasingly mercantilist policies. It's also seeking a larger role in the existing global framework, with entry of the yuan into the IMF's basket of reserve currencies on October 1 the most recent example.
An all-out trade war would be a disaster for China's economy, with Trump's threatened tariff potentially wiping off almost 5 per cent of its gross domestic product, according to a calculation by Daiwa Capital Markets.
John Williamson, whose Washington Consensus of open trade and deregulation was effectively the governing ethos for the IMF and World Bank for decades, said the 2008-09 financial meltdown had undercut support for economic integration.
"There was agreement on globalisation before the crisis and that's one thing that's been lost since the financial crisis," said Williamson, a former senior fellow at Peterson Institute for International Economics who is now retired.
The growing opposition to economic integration has been fuelled by a sub-par global recovery. The world economy turned in its worst performance in six years in 2015, expanding by 3.1 per cent, according to calculations by the IMF.
"Perhaps the most striking macroeconomic fact about advanced economies today is how anaemic demand remains in the face of zero interest rates," former IMF Chief Economist Olivier Blanchard wrote last week in a policy brief for the Peterson Institute.
The world economy is getting some lift after rising at an annual rate just shy of 3 per cent in the first half of this year, according to David Hensley, director of global economics for JPMorgan Chase & Co in New York.
But much of the boost will come from a lessening of drags rather than from a big burst of fresh growth, said Peter Hooper, chief economist at Deutsche Bank Securities in New York and a former Federal Reserve official.
Recessions in Brazil and Russia are set to come to an end, while in the US cutbacks in inventories and in oil and gas drilling will wane.
"I'm characterising the global economy as something akin to a driverless car that's stuck in the slow lane," said David Stockton, a former Fed official and now chief economist at consultants LH Meyer. "Everybody feels like they're being taken for a ride but they're pretty nervous because they can't see anybody in control."
Still, for the first time in the past few years, Stockton said he sees a real upside risk to his forecast of continued global growth of around 3 per cent next year. And that's coming from the possibility of looser fiscal policy in the US and Europe.
In the US, both Clinton and Trump have pledged to boost infrastructure spending on roads, bridges and the like.
In Europe, rising populism provides a powerful incentive for governments to abandon austerity ahead of the elections next year -- and perhaps beyond.
Whether such a shift will be enough to mollify those who have been on the losing side of globalisation for decades is debatable, however.
"The consensus in policy-making circles was that more trade meant better economic growth," said Standard Chartered head of Greater China economic research Ding Shuang, who worked at the IMF from 1997 to 2010. "But the benefits weren't shared equitably, so now we see a round of anti-globalisation, anti-free trade.
"Globalisation will stall for the moment, until we can find a way to share those benefits," he added.
GROWING PRESSURE
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Calls for less integration and more trade barriers also pose risks
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Free trade has become polling poison in the US presidential campaign, with Hillary Clinton now criticising a trade deal with Pacific nations
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Donald Trump has lashed out at Mexico and China, threatening to slap big tariffs on imports from both nations
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Policymakers have described the current surge in populism as the greatest threat to the EU
- The growing opposition to economic integration has been fuelled by a sub-par global recovery
Bloomberg
