Speech

Remarks by Naoyuki Shinohara
Deputy Managing Director
International Monetary Fund
Beijing, China — October 22, 2014

As prepared for delivery

Good morning! It is a pleasure to address colleagues from the Asia Pacific region today. I would like to take a few minutes to address the global outlook and specific policy challenges.

The Economic Outlook

The global recovery is proving weaker than expected. After disappointing growth earlier this year, our projection for the world economy has been reduced to 3.3 percent growth this year from 3.7 percent in our April forecast, with a modest pickup next year to 3.8 percent. For APEC, growth is projected at 3.9 and 4.3 percent in 2014 and 2015, respectively.

Among advanced economies, the recovery is expected to be strongest in the U.S., where activity picked up in the second quarter after a weak first quarter. The rebound should be modest in Japan, and weakest in the euro area. Overall, the legacies of the global financial crisis remain, including high debt and joblessness.

Emerging market and developing economies—led by Asia—will continue to drive global growth. China’s slowdown should be gradual, while the recovery in ASEAN and India should strengthen next year. Even in emerging market and developing economies, growth is likely to be slower.

Risks and Policy Priorities

We believe that downside risks have increased at the global and regional levels.

Until very recently, low interest rates and increased risk appetite boosted asset prices, and volatility indicators had fallen close to pre-crisis levels. Our recent Global Financial Stability Report expressed concern that markets might be under-pricing risk. We are closely watching market developments over the past few weeks.

More broadly, as U.S. monetary policy normalization proceeds, policy makers should be alert to interest rate spikes and capital flow reversals. This risk is particularly relevant for many emerging APEC economies that have received sizable portfolio inflows.

Another concern is shadow banking. In the U.S., the less-regulated, nonbank sector is now significantly larger than the traditional banking system. European shadow banks are about half the size of the traditional sector, and China has the world’s fifth-largest shadow banking sector. So safeguarding financial stability is a critical priority, with additional strengthening of regulation and supervision.

Geopolitical risks— as in Eastern Europe and the Middle East—also could affect financial markets and commodity prices. In addition, the Ebola outbreak in West Africa is a humanitarian crisis whose economic impact must be watched closely.

Looking ahead, there is a risk that global growth could remain mediocre. Expectations of low potential growth and weak aggregate demand can be reinforcing. This applies primarily to advanced economies—particularly the euro area, but it also affects emerging economies.

Actions are needed on two fronts: continued support for domestic demand and reforms that can boost supply. In advanced economies, continued support from monetary policy is needed—along with fiscal policy, where feasible. Emerging markets need structural reforms and preparation for U.S. monetary policy normalization and shifting market sentiment Strengthened fundamentals and rebuilt policy buffers are priorities.

Infrastructure Investment

This brings me to the opportunities of infrastructure investment and financing. In a number of economies, increased public infrastructure investment could support short-term demand and boost potential output.

The stock of infrastructure capital as a share of output has fallen considerably over the past thirty years across most economies. In emerging markets and low-income countries, infrastructure provision per capita remains a fraction of the advanced economies. But in some advanced economies, aging infrastructure and insufficient investment are serious issues.

Where slack exists in economies and monetary policies are accommodative, the boost to aggregate demand from infrastructure investment can be bigger. Where countries have fiscal space, public investment financed by debt can have larger output effects.

The potential returns are high, including across the APEC membership. However, actual returns may be limited if the investment process is inefficient. Therefore, a key priority is to improve the quality of public investment.

The IMF supports APEC’s infrastructure agenda and is prepared to assist through our work with our APEC members.

Thank you very much.