"Global Prospects and Policy Challenges" by Deputy Managing Director Shinohara's Speech at the Japan Society, New York
IMF News, April 25, 2013
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- Published: April 25, 2013
Global Economic Prospects
- World growth is expected to reach 3.3 percent in 2013, and 4 percent in 2014.
- Recovery characterized as a “three-speed” global recovery:
- Emerging and developing economies: leading recovery; accounting for three-quarters of global growth over the past half decade.
- Countries on the mend: e.g., the U.S.
- Countries with distance to travel: the Euro Area and Japan.
- Regional growth projections and developments:
- Developing Asia projected to grow at 7.1 percent in 2013.
- Sub-Saharan Africa projected to grow at 5.6 percent in 2013.
- Middle East and North Africa face challenges tied to political transitions after the Arab Spring.
- Financial conditions and risks:
- Bank credit increased by 13 percent in Latin America over the past year.
- Bank credit increased by 11 percent in Asia over the past year.
- Corporations in emerging markets taking on more debt and foreign exchange exposure.
- Low-income and frontier economies:
- Higher growth since 2008 than pre-crisis years, aided by high commodities prices, investment flows from emerging market countries, good harvests, rising domestic demand, and improved governance.
- Advanced economies:
- U.S. modest recovery: about 2 percent in 2013 and 3 percent in 2014.
- Achieved despite strong fiscal consolidation equivalent to about 1.8 percent of GDP.
- Budget sequester results in too much short-term fiscal consolidation; credible medium-term roadmap lacking.
- Euro area: forecasted mild contraction of one-quarter of a percent this year.
- Germany forecasted to grow 0.6 percent this year.
- France’s growth slightly negative this year.
- Spain and Italy to experience substantial contractions.
- Across the European periphery, credit has contracted by 5 percent since the onset of the crisis; unemployment in some countries exceeds 20 percent.
- Japan:
- New three-pronged approach: higher inflation target and more aggressive quantitative easing, flexible fiscal policy, structural reforms.
- Immediate actions: 2 percent inflation target; fiscal stimulus of about 1½ percent of GDP over two years.
- IMF forecast for Japan: 1.6 percent growth this year.
- Concern: very high public debt — fiscal stimulus without medium-term consolidation risks investor risk premia and unsustainable debt.
Global Policy Challenges
- Rebalancing global demand:
- Address imbalances between large current-account surplus countries and deficit countries (example: more investment in Germany and more consumption in China).
- Financial sector reform:
- Need to complete reform agenda: more stringent capital and liquidity requirements, capital surcharges for global banks, clearer standards of supervision and resolution.
- Remaining issues: oversight of banks considered “too big to fail,” inadequate supervision of derivatives markets and shadow banking, uneven progress across countries.
- Jobs and equity:
- Urgent priority due to disproportionate human cost of the crisis on young people.
- Job creation best achieved through growth and supportive labor market policies.
National Challenges and Policy Recommendations
- Emerging market and low-income economies:
- Main challenges: weak demand from traditional markets and rapid increase in global liquidity leading to capital inflows and exchange rate pressure.
- Recommended actions:
- Rebuild fiscal buffers depleted by demand-boosting measures.
- Strengthen financial regulation and supervision; apply macroprudential policy to manage volatile capital flows.
- Reform expensive subsidies (notably energy subsidies) to direct limited resources to infrastructure and targeted social programs.
- United States:
- Imperative to raise the federal debt ceiling without doubt.
- Need for an agreement on a credible, medium-term fiscal roadmap.
- U.S. debt reduction via entitlement and tax reform.
- Monetary stance appropriate but may be overburdened and generating adverse spillovers.
- Exit from unconventional monetary policies poses risks: long-term bond rates could overshoot or capital could suddenly move out of emerging markets.
- IMF will continue to engage on exit policy options and analyze spillovers.
- Euro area:
- Monetary policy should remain accommodative; fiscal consolidation should be calibrated country-by-country.
- Countries with fiscal space should increase spending to strengthen demand; those tightening should protect the vulnerable.
- Urgent tasks:
- Fix banking systems by prompting banks to repair balance sheets.
- Implement structural reforms to rebuild competitiveness.
- Collective solutions needed:
- Bank recapitalization through the European Stability Mechanism.
- A real banking union adding a single resolution authority to the supervisory authority, and a deposit insurance fund.
- Greater fiscal integration.
- Consider development of new credit instruments for nonfinancial enterprises (e.g., securitized lending for small and medium-sized businesses).
- Japan:
- Bank of Japan’s easing framework aimed at achieving 2 percent inflation over the next two years; monetary policy alone insufficient.
- Complementary fiscal and structural reforms required.
- Fiscal risks: without credible fiscal and growth plans, aggressive monetary easing could focus market concerns on deficit financing and trigger a sudden rise in interest rates.
- Importance of growth and fiscal strategies the government plans to announce this summer being ambitious and credible.
- Specific policy recommendations:
- Confirm consumption tax increases planned for 2014 and 2015, with the single rate structure intact.
- Carry out labor market measures to spur employment—especially of women.
- Deregulate product and service sectors to increase productivity.
- Financial sector reforms to encourage investment in new and innovative sectors.
- Japan’s decision to enter Trans Pacific Partnership negotiations signals willingness to enact growth-boosting reforms.
- Concerns about spillovers from BOJ policy (sudden capital flows, competitive devaluations) may be exaggerated if Japan pursues a comprehensive package of fiscal, monetary, and structural reforms.
Conclusion
- Restoring global growth and stability requires collective government action.
- The international community must remain focused on building a framework for a new era of growth and stability, continuing the unprecedented collaboration seen at the height of the crisis.
Deputy Managing Director Naoyuki Shinohara, "Global Prospects and Policy Challenges," Japan Society, New York, April 25, 2013.