IMF Survey : The Global Economy in 2016
IMF News, January 4, 2016
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- Published: January 4, 2016
Overview
- Interview with Maury Obstfeld, who joined the IMF in September as Economic Counsellor and Director of Research.
- Review of major economic developments in 2015 and forward-looking issues for 2016.
- Key institutional milestones in 2015 noted: U.S. Congress passed the 2010 quota reform; China’s currency, the yuan, was added to the IMF’s basket of official currencies.
- Date on page: January 4, 2016.
Major developments in 2015
- Divergent performance:
- U.S. economy: continued solid growth and job creation.
- Europe: generally picked up speed.
- Japan: described as “a question mark.”
- Emerging and developing economies: continued to slow, with some exceptions (such as India), affected by plummeting commodity prices and tighter financial conditions.
- Geopolitical and political tensions amplified economic challenges in some countries.
- Institutional change: U.S. Congress approved IMF quota reform originally agreed in 2010, strengthening the IMF’s capacity.
Risks and issues to watch in 2016
- China:
- Economy slowing during transition from investment and manufacturing to consumption and services.
- Global spillovers through diminished imports and lower commodity demand larger than anticipated.
- Remaining challenges: state-owned enterprise balance sheet weaknesses, financial market strains, and resource allocation flexibility.
- Risk that growth below official targets could spook global financial markets; alternatively, methods of enforcing growth targets could extend imbalances.
- Refugee crisis:
- Crisis of refugees fleeing Iraq and Syria challenges EU absorptive capacity of labor markets and political systems.
- Special strain on Lebanon, Jordan, and Turkey.
- EU perimeter policing and free mobility tensions to watch.
- Climate change:
- Slow-moving but critical crisis; COP21 Paris agreement seen as a triumph for international cooperation.
- 2016 expected to show national capital reactions and initial effectiveness of the agreement in promoting cooperation.
- International trade:
- Trade growth has slowed relative to GDP growth.
- Key questions: whether the Trans-Pacific Partnership (TPP) will pass the U.S. Congress (decision possibly in spring 2016) and whether that could lead to a U.S.–EU deal.
- Doha round effectively scrapped in Nairobi; consideration of more limited-scale trade liberalization options.
Emerging markets and financial conditions
- Emerging markets central in 2016 outlook:
- Capital inflows are down.
- Some reserves have been spent.
- Sovereign spreads have widened.
- Currencies have weakened.
- Growth is slowing sharply in some countries.
- Currency depreciation has been an important buffer against shocks to date.
- Sharp further falls in commodity prices, including energy, would worsen conditions for exporters and could trigger sharper depreciations, hidden balance sheet vulnerabilities, or inflation.
- Global financial market mood: glum and susceptible to increased volatility despite accommodation from the European Central Bank and the Bank of Japan.
- U.S. Federal Reserve: launched in December what it intends to be a cycle of gradual interest-rate hikes; critical how subsequent increases are managed and communicated.
- Concluding assessment: global financial conditions are tightening; emerging and developing markets are especially sensitive.
Analytical and research priorities for the IMF
- Need for intensified focus on emerging and developing economies:
- Historical PPP shares: during the 1980s emerging and developing economies accounted for around 36 percent of global GDP and some 43 percent of global GDP growth (with PPP weights).
- For 2010-2015, the numbers were 56 percent and 79 percent, respectively.
- Research agenda items:
- Classic balance of payments issues: capital flows and their management, foreign exchange intervention, vulnerabilities in external balance sheets, determinants of current account balances, trade patterns, and trade volumes.
- Policies and frameworks conducive to higher potential output and its growth.
- Investigation of reasons for apparent worldwide declines in potential GDP growth; April 2016 WEO to examine advanced-economy structural reforms in that context.
- Trends in inequality: implications for economic productivity and political sustainability of market-friendly policies; how to make growth more inclusive.
- Integration of the financial sector into macro-policy frameworks as an urgent priority.
- Broader remit:
- The Fund’s global scope: engages with 188 member countries and draws on 70 years’ experience of multilateral surveillance, Article IV consultations, and technical assistance.
- Historical and recent contributions cited: exchange rates and trade, global real interest rates, fiscal policy, capital flows, public infrastructure spending, the investment accelerator.
- Emphasis on reassessing doctrines and policies in light of experience and research; intellectual honesty in admitting mistakes and adapting.
Fund’s role on “new” topics (climate change, inequality, labor markets)
- Recognition that IMF resources are not unlimited; selection of areas where IMF has comparative analytical advantage is necessary.
- IMF has long engaged with macro-critical issues relevant to membership, such as women’s labor-force participation and labor-market institutions.
- Prior IMF work cited:
- April 2008 WEO chapter on global CO2 emissions and macroeconomic effects of carbon pricing.
- Fiscal Affairs department’s recent work on energy subsidies and carbon pricing.
- Managing Director Christine Lagarde emphasized these topics in lead-up to the Paris agreement.
- Conclusion: newer topics with significant macroeconomic implications are too important to ignore for a member-focused approach.
IMF Survey: The Global Economy in 2016 — IMF, January 4, 2016