Containers at a dock in Dongfang, China: Japan and China were hit by the crisis through trade, a new IMF study says (photo: HNRB/ChinaFotoPress)
IMF Crisis Analysis
The world’s five major economies—the United States, the euro area, China, Japan, and the United Kingdom (which has a highly internationalized banking sector)—together account for more than half of global output, 70 percent of net global financial flows, and almost two thirds of global saving.How did the global economic crisis, which originated in the United States and then spread quickly to the rest of the world, impact these five very different economies? An IMF study looks at common factors and compares policy responses.
The study sought to draw out similarities and differences in how policymakers coped with the crisis by looking at the IMF’s reports on the world’s five major economies. The reports were based on discussions IMF officials had had with the governments during May and June 2009, a period still dominated by the “free fall” after the financial crisis. Given lags in data flow, the individual reports were very much focused on policy issues related to the origin, consequences, and immediate policy responses to the crisis.
The study found that three main themes were discussed in all five country reports:
• How the crisis spread
• How policymakers responded
• How policymakers are seeking to unwind crisis-related policies
How the crisis spread
The United States, the United Kingdom, and the euro area together account for over two-thirds of global gross capital flows and their financial sectors are closely linked. As a result, the bank problems in the United States spread almost immediately to Europe. By contrast, the limited international financial integration of China and Japan meant that these two countries were not directly exposed to the toxic assets originating from the United States, a fact that helped contain the direct impact of the crisis on local banks.
Instead, China and Japan were hit by the crisis through trade. The collapse in world trade that was the outcome of lower spending by consumers in Europe and the United States on highly traded consumer durables and investment goods hit the export-oriented economies of the two Asian economies hard.
Response of policymakers
Policymakers calibrated their policy responses—which included liquidity support, bank support, and fiscal stimulus—to their countries’ circumstances. For the United States and Europe, the risk of almost instantaneous market reactions led to a disorganized rush to protect national banks—in contrast to the more coordinated monetary and fiscal response. For Asia, it meant a more traditional macroeconomic response, focused on fiscal stimulus.
But policy responses were also shaped by the institutions and policy settings of each country. This meant that factors such as how central banks are run, and the strength of automatic stabilizers built into the public finances of each economy, also played an important role in shaping each country’s individual response.
Unwinding crisis policies
Withdrawal of monetary and fiscal stimulus will be needed in all five economies as soon as clear signs of a lasting recovery emerge. Unwinding unconventional monetary policies is expected to occur organically in most countries, but there are instances where central banks may not be able to devolve assets because markets for them remain frozen.
In terms of fiscal policy, all five economies face the challenge of putting in place credible consolidation plans and avoiding premature tightening that could choke economic recovery.
The reversal of financial sector support measures is also a common challenge. A gradual response is called for, and coordination across countries in order to minimize market disruption might be needed.
Making up for lower demand
Medium-term projections across the five economies suggest a rising discrepancy between major countries’ output and demand. This raises the specter of a deficiency of demand that could result in a weak recovery. To minimize this risk, China and Japan need to redouble efforts to boost private domestic demand to make up for the retrenchment of spending elsewhere that was caused by the financial crisis, even as other countries clean up their banking systems. This may require, among other policy measures, an appreciation of the renminbi against the dollar, euro and sterling.
Comments on this article should be sent to imfsurvey@imf.org
