Towards the Next Era of Growth—Reforms and Rebalancing
June 9, 2014
The International Economic Forum of the AmericasBy Christine Lagarde
Managing Director, International Monetary Fund
Montreal, June 9, 2014
As prepared for delivery
Good afternoon. It is a great honor and privilege to receive the honorary award from the Université de Montréal. My special thanks to Rector Guy Breton for his eloquent remarks.
I would also like to thank Philippe Couillard and Gil Rémillard for their warm introduction.
It is a great pleasure to be here today in the company of such eminent leaders of the global community. For 20 years, the International Economic Forum of the Americas has served as a unique platform for galvanizing public and private opinions and expertise on issues topical to the continent.
As we gradually put the crisis behind us, we are inevitably confronted with how much the global landscape has changed and what this means for future growth. The crisis has uncovered some of the fallacies inherent in existing growth models, and left us with legacies that continue to weigh on global prospects.
So it is no surprise that policymakers ranging from Canada to China, Germany to Mexico are now revisiting the ingredients of their growth strategies. What will be the drivers of the next era of growth? How can we make the recovery stronger, more balanced, and more inclusive? One thing we know for sure: without bold policy actions, the world could slip into years of slow, sub-par and jobless growth.
Before sharing with you a few thoughts about the global economy, let me invoke the spirit of hockey, Canada’s national game. I know that this is a sensitive subject in Montreal coming so soon after Les Canadiens’ elimination from the Stanley Cup, but no doubt they will be back next year. With an unprecedented 24 championship wins, how could they not?
In hockey, there are three periods, and similarly today I will touch upon three themes. I promise not to go into overtime, and hopefully I will not end up in a penalty shoot out with John Micklethwait:
- First, a brief overview of the state of play of the global economy—a view from the top of the arena;
- Second, a tour de table of some key players; and
- Third, I would like to offer some thoughts on laying the foundations for the next era of growth—the theme for this year’s forum, and turn more specifically to Canada—how to drive the “puck into the goal”.
1. State of the Global Economy
Let me start with the global economy—the view from the top row of the rink. What do we see? Some encouraging signs.
The global economy is turning the corner on the Great Recession, and overall prospects are improving. Economic activity is gaining momentum, and despite a bumpy start earlier in the year, we expect an expansion of 3.6 percent in 2014 and 3.9 percent in 2015.
Advanced economies are finally strengthening, with growth expected to be about 2.3 percent this year, even though their recovery remains uneven.
Emerging market and developing economies will continue to provide the bulk of global growth, albeit at a slower pace than before. We still expect them to grow at a healthy clip of 5 percent this year and 5.4 percent next year.
This is good news. Even so, we can see three major concerns clouding the horizon.
First, in the advanced economies, there is the emerging risk of “low-flation,” particularly in the Euro Area. A prolonged period of low inflation can derail the incipient recovery—and suppress growth and jobs. The recent proactive stance by the ECB is very welcome, and we are encouraged that it is willing to do more if necessary.
Second, in emerging market economies, there is the risk of renewed market volatility and rising financial instability associated with monetary normalization in the U.S. Good communication among central banks is essential; and a continued strong focus on policy fundamentals in emerging markets also remains key.
Third risk: in various places around the world, geopolitical tensions are rising. If not well managed, for example, the situation in Ukraine could have broader spillover implications. Recent elections, however, provide a window of opportunity to make progress on essential reforms, including with Canada’s welcome financial support.
Beyond these concerns, of course, we still need to fix problems that have been with us for some time during the crisis: unacceptably high unemployment, especially among young people; high levels of debt in many countries; and the need to complete the financial reform agenda. Many countries also need to implement structural reforms to boost growth—particularly in labor and service markets and greater infrastructure investment. While there has been some progress in each of these areas, a lot of work remains to be done.
So my bottom line: global activity is gaining momentum, but the recovery remains fragile and uneven, and faces the twin enemies of complacency and fatigue.
2. Tour de Table of Key Players
So as I said, this is the view from the top of the arena. Let’s zoom in and get some ‘statistics’ on the key players.
In the United States—Canada’s major trading partner—growth in early 2014 has lost some of its earlier momentum, in part due to an exceptionally harsh winter—or what the Canadians would call “Spring”. That said, a meaningful rebound in U.S. economic activity is now underway, and we expect growth to exceed potential over the next few quarters, driven by robust private demand. In terms of challenges ahead, the withdrawal of monetary support by the Fed should continue to be carefully managed, and a durable medium-term fiscal plan agreed.
In Japan, underlying momentum is strengthening, supported by monetary policy and stronger investment. Yet, more ambitious structural reforms and a concrete medium-term fiscal plan are still needed for growth to be sustained.
The Euro Area is also emerging from recession, although growth is stronger in the core and weaker in the South. Europe has come a long way with profound changes to its economic architecture—it is critical now to follow through and complete the reforms, especially on banking union.
How about emerging market and developing economies? They have been an important pillar of support to global activity during this crisis—the ‘playmakers’ of the world if you like. They continue to play that role.
Emerging Asia in particular remains a bright spot, pushing ahead with the world’s highest growth rate of around 6¾ percent in 2014-2015. A key driver of this ‘breakaway’ performance is China, which is forecast to grow at a slower but more sustainable pace of about 7½ percent in 2014, and 7 percent in 2015.
Another region that continues to “rise” is Sub-Saharan Africa—from which I have just returned. Many African countries have managed to weather the crisis well and sustain an expansion of around 5 percent per year on average—the second highest after Asia. With large untapped potential—both natural and human—the forecast is for this growth to continue. But as well as “rising,” Africa also needs to be “watching”: in some countries, rapid debt accumulation and erosion of fiscal space pose risks that need to be managed.
In Latin America, despite a modest acceleration in activity, growth is expected to remain in a lower gear—rising from 2½ percent in 2014 to 3 percent in 2015. Of course, growth dynamics vary widely across the larger economies: Mexico, for example, is expected to benefit from stronger U.S. growth, while in Brazil, low confidence seems likely to hold back investment and activity.
Finally, a word on the Middle East, another region I visited just recently. Even though the situation in several of those countries remains difficult, I was extremely encouraged by the spirit to build a better future. Working together with all partners—including the IMF—is clearly the way forward.
3. Canada—Policies for the Next Era of Growth
So where does our hockey game stand? I have talked about the view from the top of the arena; we have analyzed some of the moves of the key players. Which brings me to my third topic— the foundations of the next era of growth and the key elements of a strategy for “driving the puck into the goal”.
Clearly, the major challenge for all countries—including Canada—is to make growth stronger, more inclusive, and greener. These are difficult and complicated questions that policymakers are grappling with, and there are no one-size-fits-all solutions.
Across the world, many countries are trying to rebalance their economies toward more stable sources of growth—be it China, trying to rebalance away from investment toward consumption, or Germany trying to boost domestic sources of demand.
Canada is also rebalancing its economy from consumption and housing towards exports and business investment as key drivers of growth. Last year, and for the first time since 2001, the contribution of net exports to overall growth turned positive, but the performance of non-energy exports and investment remains weak.
Looking forward, we expect growth to pick up to about 2¼ percent in 2014, with the continued recovery in the U.S. boosting Canada’s exports and business investment. Policies should sustain the acceleration of activity—monetary policy supporting demand until the recovery is cemented, and fiscal policy striking the right balance between propping up growth and rebuilding fiscal space.
Moreover, Canada’s rebalancing is taking place alongside the transformation of the North American energy sector. It is seeing the contribution of its once dominant manufacturing sector shrinking, without having yet fully tapped the potential of its energy sector.
No doubt about it: the energy sector holds large prospects for Canada. Yet these prospects need to be unleashed. How? I see two priorities:
First, an expansion in transport infrastructure would allow Canada to tap into favorable growth dynamics in regions beyond North America, especially in Asia. A more open regime for inward foreign direct investment could help in easing infrastructure constraints. By some IMF estimates, full market access to Canada’s energy products could raise GDP by about 2 percent over a 10 year horizon.
Of course, we need to be watchful that such expansion is not to the detriment of the environment. We at the IMF have begun to look at this from a macroeconomic perspective, with energy prices taking center stage. That means making sure prices cover not only the direct costs of supplying energy but also the environmental externalities associated with production and use of fossil fuels – the waste water (which increases a variety of risks), and the broader side effects from vehicle use – congested roads, traffic deaths, and so on.
I am glad to say that, in some respects, Canada has been a pioneer in this area. But more could be done, both in Canada and in other countries, as we will emphasize in a book that is to be published in a few weeks.
The second priority is that growth in the energy sector needs to become more inclusive—its contribution to the economy broadened, and its benefits more widely shared. Stronger linkages between the energy sector and the broader economy can certainly help. Removing barriers to internal labor mobility and trade are important elements of this strategy—both to bring people with important skills to the areas where the jobs are, and to bring more jobs to people that are not living in the resource-rich areas. Productivity could also get a boost from these measures.
Moreover, actions on these fronts are important not only for the prosperity of the Canadian economy, but for the entire region. After all, it was the expansion in North American oil production that helped keep oil prices stable over the past three years, despite significant geopolitical disruptions in the Middle East and Africa.
So as the game wraps up, there are great prospects ahead for Canada to lift its potential and score the goal for the next era of growth ahead.
Let me conclude – hopefully I have stayed within regulation time.
Just as our 188 member countries have been changing in the face of the crisis, so has the IMF. In our three main lines of business—surveillance, capacity building and lending—we have made dramatic changes in the way we work. My message: this is not your father’s IMF.
This is not the place to go into detail, but I do want you to know that the IMF—even more than in the past—is focused on providing an effective forum for global economic and financial cooperation.
Why is cooperation important? As any hockey team can attest, team work is key.
If countries implement the right set of policies for their domestic welfare, the whole world will get to benefit. Indeed, in the context of the G20 meeting in Sydney, our estimates suggest that cooperative action can increase global output by 2 percent over the next five years. Reaping these benefits lies in working together in laying the foundations for the next era of growth.
This is something that Canada—a staunch supporter of multilateralism—knows well. In that context, let me underscore our appreciation of Canada’s commitment to the Fund and to multilateralism.
To paraphrase Lester B. Pearson, Canada’s former Prime Minister and winner of the Nobel Prize for his efforts in establishing the UN Peace Keepers: “We need action not only to end the crisis (fighting) but to make the peace”—that is, to make this recovery broad, strong, inclusive. One that lasts.