Brexit, low growth and the spectre of protectionism stalk an IMF in sombre mood

While the IMF has revised upwards its short-term forecasts for the UK economy, it remains convinced that the long-term impact will be negative, particularly if Theresa Mays government makes control of migration a higher priority than continued access to the single market.

Christine Lagarde, the IMFs managing director, will urge the Bank of England and the Treasury to continue providing stimulus to the economy, with a warning that there could be fresh turbulence for both the UK and the rest of the EU when, with the triggering of article 50, divorce proceedings eventually start.

Even so, having been a cheerleader for what Leave campaigners called Project Fear, Lagarde and her officials will have some explaining to do. Hammond is keen to talk up the prospects for the UK economy and will expect Lagarde to be less pessimistic than she was during the referendum campaign. The IMF can be expected to focus on other worries and it has plenty of choice.

The IMFs global financial stability report is likely to highlight the problems of European banks hobbled by hundreds of billions of euros worth of non-performing loans. It will be urging a speedy resolution of the problems besetting Deutsche Bank. It also fears that defeat for Italys prime minister, Matteo Renzi, in the referendum on reform of the senate called for December would lead to a political and economic crisis that would have ramifications for the whole eurozone.

Other countries being closely monitored by the IMF include the US now set to grow more slowly in 2016 than was predicted six months ago and China, where the government is trying to rebalance the economy away from its reliance on exports.

Adjusting to the new mediocre

Ten years ago, the global economy was growing rapidly. Between 2003 and 2006, global growth averaged more than 5% a year the strongest performance since the early 1970s. The IMFs flagship publication, the World Economic Outlook, could see no reason why the new normal would come to an end and hailed the liberalisation of world financial markets as an unmitigated benefit.

Times have changed. The new normal has become what Lagarde describes as the new mediocre in which growth remains stuck at barely more than 3% a year, thanks largely to the persistently poor performance of the developed nations: the US, Europe and Japan.

For the past several years, the global recovery has been weak and fragile, and this continues to be the case today, especially for advanced economies, she said in a speech last week. And while there are some good signs, the overall growth outlook still remains subdued.

The IMFs concerns about Brexit stem, in part, from the knowledge that it would not take much for mediocre growth and low levels of inflation to turn into recession and deflation.

Central banks are out of ammo

Global growth has been weak despite the best efforts of central banks. They have cut interest rates to record low rates and made repeated use of the money-creation process known as quantitative easing in an attempt to boost demand.

This weeks meeting take place against a backdrop of growing speculation that the US Federal Reserve will raise interest rates before the end of the year. But other central banks the Bank of England, the Bank of Japan and the European Central Bank are moving in the opposite direction and providing additional stimulus.

Lagarde has maintained a neutral position on a rise in US interest rates, but is known to fear the volatility a rate rise could bring as money held in developing world banks, and even in London and Frankfurt, flows to the US in search of a safe return at a higher rate. She also thinks central banks are being asked to do too much, and that achieving higher levels of growth will require a three-pronged approach: monetary stimulus, tax cuts or spending increases from finance ministries, and structural reform.

The IMF has urged countries which have the financial headroom to do so to spend money on growth-boosting public investment. In a recent speech, Lagarde singled out Canada, Germany and South Korea as ones with plenty of spare cash. And this comes after an IMF report at the beginning for the year called on the G20 nations, including the UK, US, Mexico and Turkey, to ramp up their outlay on much-needed infrastructure projects.

The ghost of protectionism

The IMF was born out of the turmoil of the 1930s, when tit-for-tat protectionism amplified the effects of the Great Depression. Since its creation at the Bretton Woods conference in 1944, the IMF has been at the forefront of attempts to reduce barriers to trade. It now views with alarm the ebb tide of globalisation, seen in the anti free-trade rhetoric of Donald Trump, the stalling of negotiations between Washington and Brussels on the Transatlantic Trade and Investment Partnership (TTIP) and the Brexit vote.

The director general of the World Trade Organisation, Roberto Azevdo, will join Lagarde in Washington this week to make the case for freer trade. The concern of both organisations is not just that there has been a gradual rise over the past four years in the number of protectionist measures introduced, but that there is a risk of an anti-trade narrative taking root, which says all the gains from openness are being captured by a tiny global elite.

Lagarde says this mood is encouraged by growing inequality, and that tackling the divide between rich and poor would make it easier to negotiate trade deals and for governments to push for other structural reforms.

A new debt crisis

For the past decade, the activities of the IMF have overshadowed those of its sister organisation, the World Bank, which also holds its annual meeting this week. The focus has been on the problems of the developed world the sub-prime crisis, the near collapse of the banks, the threat to the euro and Brexit rather than on the worlds poorest countries, many of which had been growing rapidly as a result of booming commodity prices.

Many poor countries borrowed heavily on the global capital markets during the good times but are now finding the environment far more hostile. Weak demand in the developed world has led to sharp falls in commodity prices and slower growth in developing countries. The World Bank expects growth in sub-Saharan Africa to be just 1.6% the lowest in more than two decades.

Angola, Kenya and Nigeria are among countries that have already turned to the IMF and the World Bank for help, and if growth remains weak others are likely to join them.

The echoes of another age one when the annual meetings were dominated by calls for debt relief are getting louder.