The Global Economy in 2014
By Christine Lagarde, Managing Director, IMF
National Press Club, Washington DC
January 15, 2014
AS PREPARED FOR DELIVERY
Good afternoon. I would like to thank the National Press Club, and especially President Angela Greiling Keane, for inviting me to this prestigious venue.
Let me begin by wishing you all a happy New Year. I think this is appropriate, given that we are halfway between western New Year and lunar New Year!
It is also appropriate for what I want to talk about today—how the IMF sees the global economy as the wheels of time roll into yet another year.
If we think about it, 2014 will be a milestone in many respects. It will mark the hundredth anniversary of the start of the First World War, the 70th anniversary of the Bretton Woods conference that gave birth to the IMF, and the 25th anniversary of the fall of the Berlin Wall.
It will also mark the 7th anniversary of the financial market jitters that quickly turned into the greatest global economic calamity since the Great Depression.
This crisis still lingers. Yet, optimism is in the air: the deep freeze is behind, and the horizon is brighter. My great hope is that 2014 will prove momentous in another way—the year in which the “seven weak years”, economically speaking, slide into “seven strong years”.
Is this wishful thinking? No, but it will not simply happen on its own. Getting beyond the crisis still requires a sustained and substantial policy effort, coordination, and the right policy mix. Let me talk about this—I will start with the global outlook, and then touch on the policy path I have in mind.
Global outlook and risks
In just a few days, we will be releasing our updated forecasts. While our numbers are still being finalized, I will talk about the main trends as we see them.
• Momentum strengthened in the latter half of 2013, and should strengthen further in 2014—largely due to improvements in the advanced economies.
• Yet, global growth is still stuck in low gear. It remains below its potential, which we think is somewhere around 4 percent. This means that the world could create more jobs before we would need to worry about the global inflation genie coming out of its bottle.
• Even for the advanced economies, however, the outlook is still subject to significant risks. With inflation running below many central banks’ targets, we see rising risks of deflation, which could prove disastrous for the recovery. If inflation is the genie, then deflation is the ogre that must be fought decisively.
• During the years of crisis, we have relied on the emerging markets to keep the global economy afloat. Together with the developing countries, they accounted for three-quarters of global growth over the past half decade. However, a growing number of emerging markets are slowing down as the economic cycle turns.
• We also see risks arising from financial market turbulence and the volatility of capital flows. The reaction to the Fed’s tapering has been calm so far, and this is good news, but there still could be some rough waters ahead.
• Overall, the direction is positive, but global growth is still too low, too fragile, and too uneven. Moreover, it is not enough to create the jobs for the more than 200 million people around the world who need them.
• In far too many countries, the benefits of growth are being enjoyed by far too few people. Just to give one example: in the United States, 95 percent of income gains since 2009 went to the top 1 percent. This is not a recipe for stability and sustainability.
The policy agenda
This all points to one thing: the need to stay focused on the policies needed for sustainable growth and rewarding jobs, which in the end are needed to make everybody better off. Let me focus on this.
We have certainly avoided a worst case scenario during the crisis, thanks to the efforts of global policymakers over the past half decade. Central banks went above and beyond the call of duty to keep interest rates low and the financial system functioning, while governments deployed fiscal stimulus where they could.
The road has certainly been difficult, and continues to be difficult, but as Edward R. Murrow once said, “difficulty is the excuse history never accepts”.
Now that the global economy looks more stable, the big priority for policymakers in 2014 is to fortify the feeble global recovery and make it sustainable. What does this mean in practice?
For the advanced economies in particular, it means that central banks should return to more conventional monetary policies only when robust growth is firmly rooted. At the same time, countries need to use the room created by unconventional monetary policies to put in place the reforms needed to jumpstart growth and jobs.
Let me go deeper and touch briefly on the different regions.
• Growth is certainly picking up in the United States, driven by private demand, and to be helped by the loosening of the fiscal corset in the recent budget deal. Still, it will be critical to avoid premature withdrawal of monetary support and to return to an orderly budget process, including by promptly removing the debt ceiling threat.
• The Euro Area is turning the corner from recession to recovery, but growth is still unbalanced, and unemployment is still worryingly high. Some countries are doing well, but others are still burdened by high debt and credit constraints. Monetary policy is helping a lot, but could still do more—targeted lending, for example, could help reduce financial fragmentation. The forthcoming review of asset quality and stress tests can also help, but only if they are done in an evenhanded and credible manner. There is also a need to accelerate reforms to boost labor market participation and enhance competitiveness.
• In Japan, the initial boost from Abenomics is weakening a bit, but temporary fiscal stimulus should help offset the negative effects of the necessary consumption tax increase. The challenge is to agree on medium-term fiscal adjustments and social and economic reforms needed to strengthen growth. Deregulating product and service markets and increasing the participation of women in the workplace would help overcome the ogre of deflation.
• What about the emerging markets? The challenge here is to navigate any bumpiness and stay strong. Policymakers must be wary of any signs of financial excess, especially in the form of asset bubbles or rising debt. Financial regulation needs to be strengthened and implemented in order to better manage credit cycles. And yes, many countries also could do more on the structural front to unlock their growth potential—including by tackling infrastructure bottlenecks or regulatory obstacles.
• What about the low-income countries? Here, the news is generally good. These countries have really become a bright spot. Now is the time to lock in these gains and build stronger defenses against either direct or consequential external shocks, including by raising more revenue. In addition, countries should keep spending selectively on important social programs and infrastructure projects.
• I should mention that I have just returned from the two most dynamic regions of the world—Asia and sub-Saharan Africa, which saw growth of 6½ percent and 5 percent last year respectively. Here in Washington DC, we sometimes forget the monumental change taking place in these parts of the world—the rise in economic power and the march of the middle class. I always come away from these regions with renewed optimism.
• We should also remember the Arab countries in transition. The Arab Spring began exactly three years ago, and as these countries grapple with the reforms needed to unleash the dynamism of the private sector and create more jobs for their young people, they need the firm support of the international community.
I have talked so far about the regions. Yet there are also many common problems that require a common resolve. Think about the legacy of public and private debt, and about fiscal and current account imbalances. Think about the reforms needed to make the financial system safer and bring it more into the service of the real economy. Think about rising inequality, environmental degradation, and the long-term challenges of climate change.
These are not abstract challenges. It is only by addressing them that we can ensure future prosperity for all and meet the rising aspirations of our global citizens—for jobs, for security, for opportunity, for dignity.
I will conclude. At the outset, I made a reference to the Bretton Woods conference and the multilateral impetus behind the founding of the IMF. To move forward, we need that same spirit of cooperation and global solidarity today. Especially in a world as interconnected as ours, there is simply no alternative.
I believe that the IMF can play an especially valuable role here, as a forum for precisely this kind of cooperation. We have certainly played our part in the collective response to the crisis—making 154 new lending commitments and providing technical assistance to 90 percent of our members since the onset of the crisis in 2008, and providing our best possible policy advice.
One of our strengths is that we have to look at the bigger picture—how all the moving parts fit together, how what happens in one country affects the wider global economy.
This role will surely become more important with time. We need to continue to adapt and to reflect the changing dynamics of the global economy and our membership. That is why we need the continued support of our entire membership.
I will end with another icon of American journalism—and no, I don’t mean Ron Burgundy! I mean Walter Cronkite, who always ended by saying “and that’s the way it is”.
Thank you very much. I am now happy to take your questions.