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Economic Outlook and Policy Challenges, APEC Finance Minister's Meeting, Presentation by Naoyuki Shinohara, Deputy Managing Director, International Monetary Fund
November 6, 2010
As prepared for delivery
1. Good morning. It is an honor and a privilege indeed for me to address the APEC meeting. In my brief remarks, I will focus on the global economic outlook and policy challenges.
Global outlook: the multi-speed recovery is shifting gear
2. The global recovery has advanced despite setbacks to financial stability, but a number of indicators suggest the pace of recovery is slowing, including global trade flows and industrial production. However, emerging economies, especially in Asia, will remain in the lead. By contrast, in advanced economies, unemployment remains high and household consumption sluggish, suggesting that the strengthening of private domestic demand to support growth is proceeding only slowly as policy stimulus and inventory rebuilding fade.
3. As a result, we expect world output to expand 4.8 percent this year, and 4.3 percent next year. Advanced economies would expand by only 2.7 percent this year, a low rate considering that they are emerging from the deepest recession since World War II. By contrast, growth in emerging and developing economies, while moderating in the second half of 2010, would still remain robust at 7.1 percent in 2010 and 6.4 percent in 2011.
4. Inflation will remain generally subdued, except in some emerging economies. In advanced economies, with core inflation slowing to less than 1 percent and considerable economic slack, deflation may be the more pertinent risk. In emerging economies, headline inflation is expected to subside to 5 percent in 2011, from over 6 percent in 2010, in part because commodity prices are expected to stabilize. However, inflationary pressures will be more elevated in economies that have had less stable inflation in the past, or are operating closer to capacity, such as India.
As the momentum of global activity has slowed, downside risks to the recovery have risen over the course of the year. As private and financial sector balance sheets remain weak across a number of advanced economies, coupled with questions about fiscal sustainability and the recovery in real estate markets, a key risk is turbulence in advanced sovereign debt markets that could be triggered by unsuccessful debt rollovers or significant delays in implementing fiscal consolidation plans. Such an event could create renewed financial market dislocations that interrupt the transition towards stronger private-led demand. A more marked slowdown in advanced economies together with heightened global risk aversion would quickly spread to developing and emerging economies. Another risk to the outlook stems from the possibility of renewed weakness in key property markets, including the U.S., where the foreclosure backlog is large and growing. Against this background, advanced economies must begin implementing credible medium-term fiscal consolidation plans to anchor confidence and crowd in private demand. On the other hand, emerging market economies face risks of overheating from large capital inflows. Finally, without successful efforts at rebalancing global demand, the risk of protectionism would also likely rise.
Outlook for APEC
5. What are the implications for APEC countries? As mentioned before, in larger advanced APEC economies, such as Japan and the U.S., the pace of the recovery will generally remain subdued, but other advanced economies, including Canada and Australia, have been emerging more strongly from the global recession, in part reflecting robust domestic demand and stronger economic fundamentals. For emerging APEC economies in Latin America, including Chile and Peru, and to a lesser extent Mexico, robust growth in 2010 will return to more normal levels in 2011. In Emerging Asia too, the expansion will moderate from 9.4 percent in 2010 to a more normal pace of 8.1 percent in 2011. The moderation mainly reflects the challenging outlook for exports as growth of final demand in major advanced economies is unlikely to return to pre-crisis rates. While China is likely to become a more important engine for external demand growth for Asian economies, it is still a small market in comparison with large advanced economies, especially for consumer goods.
6. The main risks to this outlook are still on the downside and pertain to the global recovery. While economic fundamentals of emerging economies are generally strong, important trade and financial linkages with the rest of the world would make in particular Asian economies exposed to the downside risk of an advanced economy slowdown I described before.
Policy challenges
7. What are the key policy challenges in this uncertain, multi-speed global environment? While we still need to carefully manage the exit from policy stimulus depending on country-circumstances, overall, policy priorities should increasingly focus on medium-term requirements, aimed at rebalancing global demand. This involves internal rebalancing in advanced economies, anchored by a shift from public- to private-demand-led growth, and external rebalancing, underpinned by an increase in net exports in advanced current account deficit countries and a decrease in net exports in emerging surplus economies. While this issue of global imbalances had been somewhat forgotten during the global economic crisis, recent concerns about “currency wars” throws light on this very important medium-term challenge. Multilateral cooperation will be critical to promote external sustainability in countries and to support the pursuit of the full range of policies conducive to reducing excessive imbalances and maintaining currecnt account imbalances at sustainable levels.
8. Advanced economies must expeditiously repair and reform financial sectors to normalize credit conditions and support internal rebalancing. This would help reduce the need for the highly accommodative monetary policy stance in these economies, which is contributing to negative spillovers in the form of large and volatile capital inflows to emerging economies and associated risks of overheating. Advanced economies should also put in place and begin implementing credible, growth-friendly, medium-term fiscal consolidation plans to help achieve sustainable fiscal positions while mitigating any short-term dampening impact on private demand. As part of these plans, consolidation should begin in 2011, but if global growth slowed appreciably more than expected, countries with fiscal room could postpone some of the planned consolidation.
9. In key emerging current account surplus economies, strategies to promote export-led growth will become less viable from a multilateral viewpoint, and eventually cause tensions as countries compete for a share of global demand. A reallocation of demand from the external sector may initially be painful for some sectors in these economies, but will lead to sizable and more sustainable gains in living standards over the medium-term. A successful shift of growth toward private domestic demand would require the simultaneous implementation package of measures depending on country circumstances. Such a package would include (i) a continued strengthening of social safety nets, which should help to further reduce precautionary saving and thus boost consumption (especially in China); (ii) further advances in financial sector reforms, which can support private consumption as well as investment; and (iii) more exchange rate flexibility, which will boost household disposable income and facilitate the shifting of resources to non-tradable sectors. In order for these measures to be most effective, they need to be undertaken widely in coordination with other global players.
10. Many emerging economies are also faced with the difficult policy challenge of managing large and volatile capital inflows. In the context of global demand rebalancing, these flows should be viewed as an opportunity to facilitate adjustment towards broader-based growth, not as a hindrance. Having said that, managing large inflows will be a challenge and the task becomes more onerous in the context of limited exchange rate flexibility in some major emerging economies. The appropriate response will need to be based on whether capital inflows are assessed to be permanent or transitory, the exchange rate is fairly valued, reserves are adequate, and if there are risks of overheating.
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