The Challenges to Sustaining the Global Recovery
IMF News, October 23, 2017
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- Published: October 23, 2017
Overview
- The global recovery is strengthening.
- World Economic Outlook forecasts: 3.6 percent global growth this year and 3.7 percent next year; 3.2 percent in 2016.
- The recovery is not broad enough: countries accounting for about 75 percent of world GDP are partaking in the recovery; about 25 percent are not.
- Many developing countries and commodity exporters remain weak; 46 countries are experiencing falling GDP growth in per capita terms.
Consumption and Investment
- Sources of recent strength include both consumption and investment.
- Investment has strengthened after prolonged reticence following the Global Financial Crisis.
- Investment’s import intensity is contributing to accelerating trade; for the first time in several years, trade is growing faster than GDP.
- Advanced economies are all growing, led by the euro area and Japan.
- Stronger growth across many emerging market countries, especially China, emerging Europe, and Russia.
- Country growth notes:
- Germany: 2 percent this year, moderating to 1.8 percent in 2018.
- U.S.: growing at a little over two percent (forecast reduced due to uncertainty about fiscal stimulus).
- UK: forecast downgraded.
Distributional Concerns and Domestic Disparities
- Real wage growth across advanced economies has remained low; many people have lost ground since 2008.
- Increased inequality has contributed to populist resentment against globalization, migration, and change.
Continuing Challenges (Macro-financial risks and policy complacency)
- Risk that policymakers may become complacent during strengthening recovery; need to act now.
- Normalization of monetary policy from unconventional post-crisis policies is an overriding challenge.
- Accommodative stances remain comfortable where in effect.
- First steps toward normalization by the Federal Reserve have proceeded smoothly.
- But normalization poses risks for a financial system accustomed to historically low interest rates.
- Global Financial Stability Report findings:
- Global financial system has become more resilient: major banks and insurers have increased capital and liquidity buffers.
- Emerging markets have benefited from low-cost capital flows and can borrow to spur growth.
- Growing vulnerabilities stem from low rates, exposure to credit, maturity and liquidity risks, extremely low volatility fueling complacency.
- A sudden shift in market sentiment or a geopolitical event could be consequential.
- Cyber-threats noted as a major concern; private-sector responses may be insufficient; international bodies (G7, Financial Stability Board) are engaged.
Rising Debt
- Debt is increasing globally.
- In G20 countries, private sector leverage is higher than before the financial crisis.
- Rapid increase in indebtedness of low-income countries, with non-traditional sovereign lenders (China, Russia, Saudi Arabia) very active.
- These lenders operate outside the Paris Club and may complicate and delay resolution of problem loans.
- Responsibility of central bankers and policymakers to address financial and debt vulnerabilities before they become acute and expensive.
- Unfinished bank legacy issues remain; without continued efforts risks will stay higher and growth harder to support—applies notably to the euro zone (cleaning up bank balance sheets, improving cost efficiency, completing the banking union).
- Governments must continue to deal with crisis legacies: emerging market debt, fiscal consolidation in many countries, and euro area banking architecture.
- Broader structural issues include demographic change and migration, infrastructure gaps, labor and product market regulation, and educational shortcomings.
Emerging Market and Developing Countries: Convergence Prospects
- Emerging markets have been growth leaders, aiming to catch up with advanced economies via investment, technology adoption, and education to boost productivity.
- Projection: over the next five years emerging markets and developing countries will grow about 1.5 percentage points faster in per capita terms than the advanced economies.
- Distribution within emerging markets is uneven:
- A small group of very large economies (China, India and a few others) are catching up rapidly—growing rapidly enough to catch up by 4 to 5 points per year.
- The rest—about 43 countries—are growing more slowly than advanced economies and risk falling further behind.
- Policy message: take advantage of the recovery to "repair the roof when the sun is shining"—continue reforms to restart and accelerate convergence.
Technological Transformations
- Technological innovations are disruptive and transformative; IMF is beginning analytical work on implications.
- Softbank has put together a $100 billion Vision Fund to seed innovations in automation and AI.
- Future of Work
- Automation and artificial intelligence are changing industrialization and factory floors.
- Uncertainty about macroeconomic outcomes: will automation substitute for workers or enable new businesses and employment opportunities?
- Key question for developing countries: will technology speed up industrialization or reduce demand for lower-skilled workers, closing off traditional routes to development?
- Cyber-threats
- Example: a major bank executive reported attacks once every ten seconds.
- Equifax incident: wholesale looting of credit information affecting hundreds of millions of people.
- International attention: G7 and Financial Stability Board activity.
- Consideration of whether responses should remain decentralized/private-sector led or become coordinated government action; IMF can help analyze macroeconomic implications.
- Digital Finance (Fintech and distributed ledger technologies)
- Online payments platforms (PayPal, China’s Ali-Pay) and mobile banking (M-Pesa in East Africa) illustrate Fintech’s potential for inclusion and development.
- Fintech challenges traditional banking models as platforms develop lending and investment products; regulators and supervisors must assess whether current frameworks are adequate.
- Emergence of crypto-currencies and distributed ledger technologies may move transactions outside traditional regulatory reach, affecting monetary policy.
- Central bankers are beginning to discuss issuing virtual currencies and ways to regulate bitcoins and others.
- Need for national regulators and international standard-setters to quickly define regulatory settings that address emerging issues without stifling innovation.
- The IMF has begun work within its mandate to define the playing field and understand macroeconomic impacts.
Policy Recommendations and Imperatives
- Use the current recovery window to pursue reforms that support stronger and more sustainable growth and financial stability.
- Address financial and debt vulnerabilities proactively—before they become more acute and costly.
- Continue cleaning up bank balance sheets, improving cost efficiency, and completing banking union efforts (euro area emphasis).
- Advance structural reforms on demographics, migration, infrastructure, labor/product markets, and education to support convergence.
- Define regulatory frameworks for Fintech, crypto-currencies, and distributed ledger technologies that balance safety and innovation.
- Consider coordinated responses to cyber-threats given their macroeconomic implications; involve international standard-setters and national authorities.
- Monitor monetary policy normalization risks and financial market vulnerabilities arising from low rates and investor search for yield.
Conclusion
- The recovery presents opportunities to address outstanding policy challenges; some issues are tractable, others require further analysis and new toolkits.
- It is the responsibility of policymakers and the international community to face opportunities and challenges with existing tools or by inventing new ones.
Speech by IMF First Deputy Managing Director David Lipton, Munich, Germany, October 23, 2017 (International Monetary Fund).