Since the 2008 global financial crisis, the IMF has put greater emphasis on assessing the interconnections among the world’s economies (photo: iStock)
MULTILATERAL SURVEILLANCE
The 2013 Spillover Report finds that five years after the global financial crisis, the tensions and risks rooted in the “Systemic 5” economies—China, the euro area, Japan, United Kingdom, and the United States—have lessened, but these economies are not contributing to global activity as much as they might.
The report focuses on the Systemic 5’s “spillover effects”—that is, the impact of their policies on one another and on the rest of the world because of the large volume of trade and financial linkages in today’s economy. The challenge for these economies, the IMF says, has been to find policies that will help them reach their potential output without complicating, through spillovers, economic management in other countries.
The IMF is also releasing its 2013 Pilot External Sector Report, which examines the evolution of the external sector position—current accounts, exchange rates, capital accounts, reserves, and external assets and liabilities—of the world’s 28 largest economies plus the euro area. The two reports focus on links between developments at the country and global levels.
Lower global imbalances
The IMF reports say that while global growth has continued to disappoint, much else has gone in the right direction. Global imbalances have continued to narrow—for structural reasons, not just cyclical; exchange rates have moved closer to where fundamentals suggest they should be; and policies of the Systemic 5 have enabled them to avert far worse outcomes.
Indeed, concerted policy actions to avert some of the most significant tail risks facing the global economy are estimated to have saved 2-5 percent of global output. Global imbalances—defined as the gap between actual current account balances and those estimated by staff to be consistent with fundamentals and desirable policies—narrowed in 2012 to about ¾ percent of global GDP.
“External sector developments have been shaped by two key interrelated issues—the implications of policy measures, particularly in the advanced economies, to support growth and shifting risk sentiment,” noted David Robinson, Deputy Director of the IMF’s African Department and one of the lead authors of the 2013 Pilot External Sector Report.
Both emerging markets and safe haven economies, including a number of smaller advanced economies, have seen episodes of significant capital flows, triggering a variety of policy responses. Patterns of reserve accumulation have varied greatly in 2012—most emerging markets saw little or no change in reserves, while some advanced economies saw large increases. In addition, some oil-exporting countries continued to accumulate reserves, though the pace of accumulation slowed in the second half of 2012 as oil prices eased and domestic fiscal spending rose.
While easy monetary conditions in advanced economies appear to have played some role in exchange rate movements and capital flows, much of the capital flows seen over the last few years were driven by other factors—such as growth prospects, and global risk appetite—these factors will remain key in determining individual country outcomes, the IMF says.
Managing spillovers
A key issue analyzed in the Spillover Report is the impact of quantitative easing monetary policies deployed by central banks in some countries to revive growth. Here, the IMF finds clear evidence of positive growth spillovers from quantitative easing in the United States so far. In the case of the United Kingdom and Japan, however, the spillover effects to date are more ambiguous. And negative side effects of quantitative easing in any country may emerge over time, and need to be monitored carefully, the reports caution.
Looking ahead, the policy settings of the world’s largest economies pose risks of adverse spillovers in a number of areas.
The eventual exit from quantitative easing monetary policies of central banks in the United States, the United Kingdom, and Japan is one example. The impact of exit from these policies will depend largely on its timing: too late would risk fueling asset bubbles and imbalances, while too soon would kill growth. However, even with good timing, market reaction to the policy change could be disorderly, as developments in late May and June attest.
The Spillover Report notes that Europe and Japan are at risk of getting stuck in a slow growth trap, and that one of the downside risks for China is an abrupt slowdown in growth. In Europe, structural reforms and financial sector reform will be essential; in Japan, full implementation of the Three Arrows of Abenomics (that is, the economic policies advocated by Japanese Prime Minister ShinzÅ Abe); and in China, policies to rebalance the drivers of growth toward domestic consumption and liberalize the financial sector.
Minimizing vulnerabilities
The two reports were discussed informally by the IMF’s Executive Board in July, and their release follows the latest annual assessments of the Systemic 5. For each of the five, specific policy options were discussed to help reduce the probability of these risks materializing.
“If implemented, these policies could raise global GDP significantly over the longer term, and the benefits would be optimized if all five countries implement these packages together,” said Isabelle Mateos y Lago, Assistant Director in the IMF’s Asia and Pacific Department and one of the reports’ principal authors.
“Still, other countries could face a turbulent few years ahead, and they should do what they can to minimize their vulnerabilities to sudden changes in market mood and their reliance on demand from the largest economies,” she added.
Strengthened IMF surveillance
Since the 2008 global financial crisis, policymakers have become more aware of the risks and potential destabilizing effects that policies and shocks in major economies can have on other countries and regions.
As a result, the institution has initiated an effort to strengthen policy analysis by enhancing the assessment of interconnections among the world’s economies.
Since 2011, the IMF has prepared spillover reports analyzing the impact of economic policies in the world’s five largest economies and providing a platform for discussion of this outside impact with country authorities. And since 2012, the IMF has prepared a Pilot External Sector Report that presents a broad and multilaterally consistent assessment of the external sector policies of the world’s largest economies.
The assessments draw on results from a new Pilot External Balance Assessment (EBA) methodology, as well as other inputs. The EBA approach builds on and improves previous methods, in linking external balances and exchange rates to country policies as well as fundamental characteristics, and has been further refined this year following feedback received on last year’s report.
Together, the two reports ensure a close integration of the Fund’s bilateral and multilateral surveillance.
