Financial Times Editorial Comment: The IMF reports on a wonderful world

Financial Times Editorial Comment: The IMF reports on a wonderful world
Copyright The Financial Times Limited 2007
Published: April 12 2007 03:00 | Last updated: April 12 2007 03:00



There is always a risk of rain. When the sun is shining, though, and there are few clouds in the sky, it is neurotic to be carrying an umbrella all the time. The latest economic outlook from the International Monetary Fund suggests that the world economy is doing rather well and, with sensible policy decisions, it should continue to do so.

Global economic growth, though a little slower than last year, is strong just about everywhere. The IMF has raised its 2007 growth forecasts all over the place: in Europe - from east to west - Japan, India, Brazil, Africa and the Middle East. Chinese growth is still forecast to be 10 per cent. The only major cuts to the IMF's forecasts are for the US and Canada, and even there growth is expected to be close to its long-run trend in 2007, before accelerating in 2008.

There are short-term risks and, as an institution designed to worry, the IMF has a list of them. The most pressing is of a deeper downturn in the US, where consumer spending has slowed with the housing market, but the economy is otherwise strong. If US house prices not only stagnate but fall, and keep falling, then their economic impact could get worse. But the chances of that outcome still look relatively low.

Oil prices are still high but not dramatically higher than a year ago and the risk of inflation seems to have been weathered. Despite occasional bouts of nervousness in the financial markets, risk premiums, and therefore the cost of investing in new projects, are low.

The real danger of bad economic weather comes in the longer term. It is no accident that the world is growing fast now; there is no voodoo magic, and only a little luck. Strong growth is the result of 20 years of better economic policy around the world, the result of central bank independence, greater fiscal discipline, globalisation, technological progress, and the Uruguay round of free trade talks.

If these reforms are reversed, or merely slowed down, then global growth will suffer. Protectionism is one of the greatest risks. In the struggle to reach a deal at the Doha round of trade talks, in opposition to foreign takeovers in many countries, and in the resurgence of bilateral trade deals there are signs that further liberalisation, at least, is becoming harder. That will slow economic growth, maybe not next year, but certainly in the 2010s.

The world economy will also do better if the large US trade deficit and corresponding surpluses around the world deflate gently rather than blow up. The IMF points to some positive signs - a fall in the dollar and in the deficit - but China could help by letting its exchange rate appreciate faster.

These problems are real and need solutions but it would be wrong to overdo the gloom. The world economy has now been growing rapidly for five years in a row. It may not, indeed it almost certainly will not last forever, but while it does we should enjoy it.