Opinion: Focusing on latest data releases misses the critical economic story

The United Nation’s latest macroeconomic report underscores that unresolved trade tensions and high international policy uncertainty continue to damage prospects for economic growth. Growth forecasts for 2019 have been downgraded in most developed economies and in several developing regions, especially Southern Africa, Western Asia, and Latin America and the Caribbean.

At the same time, stronger-than-expected data releases for the first quarter in countries such as the United States and Japan have led some forecasters to put a more upbeat spin on the outlook for the world economy. But regardless of how we read the latest data points, they do not alter the fundamental picture: global economic growth is uneven and often does not reach the people who need it most.

Per capita income levels stagnated or declined in a total of 47 emerging and developing economies last year. Most of these countries have been consistently falling behind for several years. For example, labor productivity in Brazil, Mexico, and South Africa has been more or less stagnant for a decade; heavily commodity-dependent economies, such as Angola and Algeria, have struggled to sustain stable economic growth; while conflict has impeded development in Afghanistan and Iraq.

Weak income growth poses an enormous challenge as countries strive to eradicate poverty and hunger, develop essential infrastructures such as bridges and tunnels, create decent jobs and ensure access to affordable and clean energy. Economic stagnation or deterioration drives down investment and may also lead to instability, social tensions, and a self-perpetuating cycle of underperformance.

Within countries, many individuals are also consistently left behind. Headline GDP figures say nothing about how income and wealth is distributed within a country. More and more people are living in environments of persistently high or rising income inequality. Income levels at the lower end of the spectrum have largely stagnated, especially in developed economies. High levels of inequality hamper productivity growth and investment and are associated with poverty, social exclusion, weak institutions and increased risk of violence and conflict.  

The current backdrop to the world economy, of global trade tensions, international policy uncertainty, a build-up of financial risks and the accelerating effects of climate change, make the task of meeting development goals all the more challenging.

2018 saw a significant rise in global trade tensions and disputes raised at the World Trade Organization. Many of these disputes remain unresolved and the threat of further escalation remains. Bilateral merchandise trade between the U.S. and China has collapsed by roughly 15% since September 2018, also impacting global value chains in East Asia and other trading partners.

Trade between countries supports growth, productivity, and poverty reduction. A spiral of unilateral trade barriers and retaliation violates the spirit of multilateral cooperation, a fundamental element of development. On top of this, open developing economies such as Cambodia and the Republic of the Congo are particularly exposed to a retreat from multilateral trade negotiations, as dominant trading partners tend to have the upper hand in bilateral negotiations. Failure to resolve these disputes and reinvigorate the multilateral system will inevitably reduce the opportunity for developing countries to accelerate their development. It also works to the disadvantage of all, including the biggest trading partners.

Slowing economic activity and low inflationary pressures prompted shifts in the monetary stance of major central banks in the first months of 2019. While easier monetary policy has reduced some short-term risks by helping to stabilize global financial markets and capital flows, in the long run, loose monetary policy could fuel a further build-up of debt in some countries.

This in turn raises medium-term risks to financial stability, posing an additional threat to development prospects. Financial stress could trigger sharp market corrections and sudden stops in capital flows, and could also dampen support from the private sector to the development agenda, as investors seek safer or shorter-term returns.

It is increasingly clear that we need to look beyond economic growth. To secure the foundations for a dynamic, inclusive, and sustainable global economy, policymakers must work to contain short-term risks, with active involvement of the private sector, but without losing sight of the longer-term economic, social, and environmental goals. An urgent and coordinated approach to global climate policy, in tandem with concerted and committed policy action to reduce inequality, are crucial to ensure our sustainable future.