David Ross

Special edition of What I think I learned last week: At the IMF/World Bank meeting

At a time when global economies are challenged in a number of ways, including trade conflicts and tariff threats, last week I returned from attending the Spring Meeting of the International Monetary Fund & World Bank in Washington DC.  The primary focus of the meeting was global economies need to use this period of economic growth and stability to address needed reforms, especially on the fiscal side with budget deficits. This concern about undertaking needed reforms has been a recurring theme over recent meetings, but the concern was heightened this time with the release of the IMF economic forecast. The forecast is calling for the global economy to slow by 2020, by which time it may be too late to fix the fiscal imbalances.

A secondary topic centered on the Eurozone’s missing inflation and the apparent inability of monetary policy to do its job. While the looser monetary policy of the European Central Bank has worked in terms lowering unemployment from 12 million to 9 million, the tightening labor market has not created higher wages and inflation, in a situation that the economists are calling the “missing inflation.” The hypothesis presented is that the Eurozone is dominated by smaller companies who are less able to absorb higher labor costs and that the larger importance of labor unions and long term employment contracts has led to a “stickiness” that has caused inflation to undershoot targets. The conclusion was that monetary policy is not failing and that it would be a major error for the European Central Bank to start tightening too soon. With data this week showing the Eurozone economy growing at its slowest rate in a year-and-a-half, its manufacturing index hitting a thirteen month low, and Germany’s retail sales falling for the fourth consecutive month, it would seem to be a timely analysis and warning.

Other issues tackled at the meeting included the role of technology. One of the main points made is that technology is always a sequence of innovations and inventions, which can amplify current economic trends in both positive and negative directions. When it comes to the labor market, technological trends likely will require creating a more adaptable workforce. Governments will need to absorb the massive labor reallocation costs involved with an economy based upon robotics, automation, big data and artificial intelligence. Again, this points out the need for fiscal reforms today to afford these future necessities.

Economists within the International Monetary Fund were actually enthused about the technology trends. Current policy recommendations using standard economic data such as GDP, labor data or inflation are dated by the time trends can be established. Using big data, however, they are finding that they can make use of short cycle data like online searches, bank transactions, tweets, coal load shipments, etc., and advances in machine learning allow them to shorten time lags and offer better policy responses.

Summary: the world is not fully benefiting from the synchronized global recovery as economies are not addressing the debt issue while they have time. We are in the midst of a major economic change, moving from a tangible to an intangible, digitalized and aging economy that will require resources that may not be available due to the overly indebted global economy.

That’s a lot to think about in managing a fund with a long-term focus, but that’s what I think I learned last week…..