Decisive Action to Secure Durable Growth; Lecture by Christine Lagarde, IMF Managing Director, at an event hosted by Bundesbank and Goethe University, Frankfurt, Germany, April 5, 2016

IMF News, April 5, 2016

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Decisive Action to Secure Durable Growth; Lecture by Christine Lagarde, IMF Managing Director, at an event hosted by Bundesbank and Goethe University, Frankfurt, Germany, April 5, 2016

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• Published: April 5, 2016

Introduction / Overview

• Context: Lecture delivered in Frankfurt, hosted by the Bundesbank and Goethe University; remarks “As prepared for delivery.”
• Key framing: interconnectedness and internationalism as essential principles to confront global economic risks.
• Status of the global economy: “the recovery continues; we have growth; we are not in a crisis” but the recovery is “too slow, too fragile, and risks to its durability are increasing.”
• Membership context: the IMF’s 188 member countries will focus on the state of the global economy at the Spring Meetings.

Today’s Global Challenges: A Time of Uncertainty

• Recent trend: “the global outlook has weakened further over the last six months—exacerbated by China’s relative slowdown, lower commodity prices, and the prospect of financial tightening for many countries.”
• Advanced-economy conditions:
  • United States: growth flat, partly due to the strong dollar.
  • Euro Area: low investment, high unemployment, weak balance sheets.
  • Japan: weaker-than-expected growth and inflation.
• Emerging-market conditions:
  • China: transition to a more sustainable model; growth lower though still strong.
  • Brazil and Russia: downturns larger than expected.
  • Middle East: hit hard by the oil price decline.
  • India: “a bright spot—with strong growth and rising real incomes.”
  • ASEAN-5 (Indonesia, Malaysia, Philippines, Thailand and Vietnam) performing well.
• Recent improvements in sentiment: driven by further easing from the ECB, a slower pace of Fed rate increases, relative firming of oil prices, and lower capital outflows from China.
• Key downside risks identified:
  • Advanced economies: high debt, low inflation, low investment, low productivity, and high unemployment in some countries; strained bank and non-bank balance sheets by non-performing assets and low operating profit margins.
  • Emerging/developing economies: lower commodity prices, higher corporate debt, volatile capital flows, de-risking, reduced bank lending.
  • Macrofinancial feedback loops: possible spillovers to sovereign balance sheets (example: implicit guarantees of large and inefficient state-owned enterprises).
  • Increased frequency and force of cross-border spillovers from emerging economies (trade, commodities, financial markets); reference to Global Financial Stability Report, April 2016, Chapter 2.
  • Slowing global trade and elevated financial stability risks; recent market turmoil reflecting lower confidence in policy effectiveness.
• Political and non-economic risks:
  • Terrorism, global epidemics, conflict and persecution leading to refugee flows (Jordan, Lebanon, Turkey, some European countries).
  • Inequality: reference to Oxfam’s claim that “the world’s richest 62 individuals own the same wealth as the poorest 3.6 billion.”
  • Rising public frustrations that can drive inward-looking, protectionist responses.
• Macro priority: “secure the recovery and lay the foundation for stronger and more equitable medium-term growth.”

Key Actions at Country Level: A Three-Pronged Approach

• High-level strategy: structural, fiscal, and monetary measures implemented decisively and in combination so country actions add up globally.

• I. Structural Reforms: More Specificity
  • G-20 commitment: raise global GDP by an additional 2 percentage points by 2018; Lagarde calls to advance these commitments into 2016.
  • Examples of country-specific structural measures:
  • United States: expand the earned income tax credit, increase the federal minimum wage, strengthen family-friendly benefits.
  • Euro Area: improve training and employment-matching policies, especially for youth.
  • Commodity-exporters and many low-income developing countries: increase diversification.
  • Policy design note: accompany supply-side measures with supportive fiscal and monetary policies to offset short-term demand dampening.

• II. Fiscal Policy: More Growth-Friendly
  • Reorient revenue and expenditure composition to be growth-friendly.
  • Country examples:
  • India: reduced spending on costly energy subsidies to invest more in social infrastructure.
  • Japan: investing in childcare to boost female labor force participation and medium-term growth.
  • Germany: expand public investment by €17 billion in the years 2015-18 and provide labor tax relief in 2016.
  • Canada: cited as using available fiscal space with a recent budget.
  • Efficiency and returns:
  • IMF staff research: the most efficient public investors get twice the growth “bang” for their investment “buck” than the least efficient.
  • IMF Fiscal Monitor finding: GDP in advanced economies could increase by 5 percent over the next two decades if private R&D investment was raised by 40 percent; estimated fiscal cost of around 0.4 percent of GDP per year.
  • Domestic resource mobilization:
  • Strengthen domestic revenue, including by reducing energy subsidies—the direct and indirect cost of which is estimated at about $5.3 trillion globally (IMF working paper).
  • Fiscal strategy:
  • Countries with high and increasing debt and elevated sovereign spreads need further fiscal consolidation.
  • Others may expand fiscally if backed by credible, medium-term consolidation plans.
  • Prepare fiscally smart contingency measures for swift implementation if downside risks materialize.

• III. Monetary Policy: More Help from Fiscal and Structural
  • Role to date: accommodative monetary policy and quantitative easing have been crucial to support recovery.
  • Policy assessments:
  • Positive view of ECB and President Draghi’s actions to improve confidence and financial conditions in the Euro Area.
  • Negative interest rates introduced by the ECB and Bank of Japan seen as net positives in current circumstances though they carry side effects requiring vigilance.
  • U.S. Fed’s December decision and data-dependent approach described as appropriate.
  • Limitations: monetary policy “can no longer be the alpha and omega to recovery”; more effective with fiscal and structural support.
  • Transmission channel concerns:
  • High levels of non-performing loans—from EU to China—impede transmission of lower interest rates.
  • Strengthen bank balance sheets via enhanced prudential oversight, debt enforcement regimes, and insolvency frameworks.
  • Emerging/developing economy guidance:
  • Monetary policy should adapt to circumstances, including exchange rate flexibility where feasible to cushion terms-of-trade shocks.

• Political Will and Leadership
  • Implementing the three-pronged approach may require crossing political red lines; leadership and cooperation are essential.

International Action: Time for Greater Global Cooperation

• Collective priorities requiring cooperation:
  • Shore up global trade.
  • Press ahead with financial regulatory reform.
  • Tackle “global public goods” (climate change, corruption).
  • Maintain and revisit the global financial safety net.
• Crisis-era reforms acknowledged:
  • Creation of the Financial Stability Board and European Stability Mechanism, strengthened central bank swap lines, expanded prominence of the G-20.
  • IMF reforms: overhauled surveillance and lending toolkits, doubled quotas following passage of the 2010 Governance Reforms earlier in the year, enhancing financial resources and representation of dynamic emerging markets.
• Areas for revisiting the global safety net:
  • Reflect on its size given financial globalization and the scale and speed of spillovers.
  • Improve access because many emerging and developing countries cannot use key elements (e.g., advanced-economy swap lines).
  • Increase responsiveness to new challenges: digital currencies, block chain technology, cyber-hacking.
• IMF’s forward role:
  • Membership discussions on options in coming months.
  • A well-resourced Fund is fundamental.
  • Strengthen approach to helping members manage risk, volatility, and uncertainty—including a financial backstop as needed.
  • Deepen work on structural reforms, capital flows, and de-risking.
  • Be more agile on emerging issues: migration impact on growth, women’s role in labor markets, inequality, climate change—identified as “urgent macro-critical problems.”

Conclusion

• Overall assessment: global economy faces “a time of increased risk and uncertainty.”
• Call to action: leadership and cooperative, decisive policy implementation are required now.
• Epigraph: Goethe quotation used to underscore the imperative to act—“It is not enough to know, we must also apply; it is not enough to will, we must also do.”

Lecture by Christine Lagarde, Managing Director, IMF; Bundesbank and Goethe University, Frankfurt, April 5, 2016.

Content in this bundle

• 040516apdf (PDF)
• 040516cpdf (PDF)
• 040516jpdf (PDF)
• 040516rpdf (PDF)

References

• Germany and the IMF
• Japan and the IMF
• People's Republic of China and the IMF
• United States and the IMF
• Speeches
• Christine Lagarde
• https://www.imf.org/external/spring/2016/index.htm
• PRESS CENTER
• Webcast
• Global Financial Stability Report
• Making Public Investment More Efficient
• IMF Fiscal Monitor
• How Large Are Global Energy Subsidies?
• https://www.imf.org/en/home