Ensuring a Sustainable Global Recovery

IMF News, January 15, 2018

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Date and speaker: January 15, 2018 — IMF First Deputy Managing Director David Lipton; As Prepared for Delivery at the Asian Financial Forum, Hong Kong.
Overall assessment: The cyclical recovery in the global economy "is going from strength to strength"; signs point to faster growth across all regions.
Cautionary framing: The global economy is in a late stage of the long and gradual recovery from the global financial crisis; with economic slack in advanced economies diminishing, duration of the recovery is uncertain.
Policy message: "Now is the time to address vulnerabilities and structural issues" and to take steps to enable stronger growth once cyclical recovery fades.

Current dynamics:
- Capital-intensive investment and consumer demand are rising.
- Investment is import intensive, lifting world trade at a rate well above GDP growth.
- Unemployment in many advanced economies is falling; inflation remains subdued despite accommodative monetary policies.
Regional snapshots:
- Europe: growth is rebounding and is more evenly distributed than in many years.
- United States: experiencing a rebound with an expected additional short-term lift from tax reform.
- Asia: contributes two-thirds of global growth; outlook remains bright with strong consumption, investment, rising exports, and steady capital inflows.
- China: alone is providing one-third of global growth.
- Japan: growing above potential for several quarters.
- Korea: economy has held up well despite peninsula tensions.
- India: reclaiming its place as a growth leader after a short slowdown.
- ASEAN-5: gained momentum from higher investment and increased exports.

Financial vulnerabilities:
- Rapid appreciation of asset valuations over the past year raises concern about potential financial market vulnerabilities.
- Risk of unexpected monetary policy and exchange rate developments prompting sudden reversals of capital flows.
Geopolitical and trade risks:
- Rising geopolitical tensions increase possibilities for protectionist action or overt security conflicts.
Medium-term growth concerns:
- Wage growth remains weak in many advanced economies.
- Productivity growth is lagging, reflecting limited progress on structural reforms.
- Aging populations will complicate reform implementation in many countries, including in Asia.
Uneven participation in recovery:
- A significant portion of the global economy is not participating in the recovery; some oil and commodity exporters continue to feel effects of low prices.
- Medium-term projections foresee that more than 40 countries, including some major emerging market countries, will grow more slowly than advanced countries and thus will not resume the trend of catching up in living standards.
- Rising indebtedness poses renewed risks for some developing countries.

Economic footprint:
- China is a key partner for over 100 countries representing 80 percent of global GDP.
- China is the hub of global supply chains, a magnet for commodity exporters, and a source of final demand.
- China is a pacesetter for digital commerce, leading in online retailing, payments, fintech, robotics, and artificial intelligence.
Financial and institutional roles:
- Chinese lending represents 25 to 30 percent of GDP in some recipient countries.
- China is the largest shareholder in AIIB and the third-largest in the IMF.
- The renminbi has joined the SDR basket of currencies.
Development finance and Belt and Road: China plays an increasingly important role in development aid and infrastructure finance, as epitomized by the Belt and Road Initiative.

Rebalancing growth toward consumption with a stronger role for private businesses:
- Pursue less public—and more private—investment.
- Implement a progressive tax system.
- Continue rationalization of state enterprises.
- Increase spending on health, education, and the poor.
Safeguarding financial stability:
- Rein in credit growth.
- Tighten oversight of some lending practices.
- Sustain recent progress in financial sector oversight to prevent financial instability from undermining economic and social progress.

Leadership in globalization:
- China has been a voice of reason supporting trade and economic integration.
Conditions for credible leadership:
- Be open to examining domestic restrictions on trade and investment that have generated criticism.
- Protect intellectual property rights.
- Reduce distortions from industrial policy, overcapacity, and policies favoring state enterprises.
Rationale: "Better globalization" requires free and fair trade and investment practices, and an updating of rules and institutions as technology and economic complexity evolve.

Debt risks in recipient countries:
- Some developing countries may face unsustainable debt burdens if recent lending trends continue.
- Chinese government and lenders have begun considering strengthened frameworks for debt resolution.
- The IMF view: "It is urgent to establish such frameworks and work cooperatively" to avoid a new debt crisis in the developing world.
Foreign direct investment considerations:
- China’s FDI brings positive benefits, but investments should be commercially viable and account for impacts on governance, capacity building, sustainable development, and environmental protection.
Multilateral cooperation:
- China’s constructive role in institutions like the IMF is critical to adapting to a changing global economy and is valued by the IMF.

Asia has been an impressive engine of growth and a source of prosperity over the past decade.
Core challenge going forward: ensure achievements are sustainable and inclusive through timely reforms, financial stability, and responsible global engagement.

Speech by IMF First Deputy Managing Director David Lipton — January 15, 2018.