The Challenge Facing the Global Economy: New Momentum to Overcome a New Mediocre
IMF News, October 2, 2014
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- Authors: Christine Lagarde Managing Director
- Published: October 2, 2014
State of the Global Economy—A New Mediocre?
- Overall view
- Global economy is weaker than envisaged six months prior; only a modest pickup foreseen for 2015; outlook for potential growth pared down.
- Recovery is brittle, uneven, and country-specific.
- Advanced economies: rebound strongest in the United States and the United Kingdom; modest in Japan; weakest in the Euro Area, with internal disparities.
- Emerging market and developing economies accounted for more than 80 percent of world growth since 2008; led by Asia and China, but growth likely at a slower pace than before.
- Low-income developing countries, including Sub-Saharan Africa, have rising prospects—with growth projected broadly to accelerate beyond the 6 percent recorded last year.
- Middle East outlook clouded by difficult economic transitions and intense social and political strife.
- Risks and "clouds"
- Low growth for a long time: lower expected growth potential can reduce investment and consumption today, impeding recovery—especially in advanced economies with high unemployment and low inflation (example: Euro Area).
- Asynchronous monetary policy normalization in advanced economies and potential spillovers to other countries via interest rates and exchange rate variations.
- Financial sector concerns:
- Asset valuations at an all time high; spreads and volatility at an all time low.
- Migration of market and liquidity risks to the less-regulated, nonbank ("shadow") sector.
- Shadow banking: in the United States, now considerably larger than the traditional banking system; in Europe, roughly half the size; in China, at 25-35 percent, it is the fifth largest shadow banking sector in the world.
- Need to complete financial sector reform: resolve the too-important-to-fail problem, set an appropriate perimeter for monitoring shadow banks, and make derivatives markets safer and more transparent.
- Geopolitical risks:
- Possible further escalation in Ukraine with disruptions in commodity prices, financial markets and trade;
- Political developments in the Middle East and parts of Asia;
- Expansion of the Ebola outbreak in Africa.
New Momentum—Policy Priorities
- Overarching approach
- Generate "new momentum" through a better balance in the policy toolkit—using both demand and supply side measures.
- Monetary policy has provided important support (example: U.S. Federal Reserve quantitative easing) but cannot suffice alone; prolonged easy money risks fueling financial excess.
- Importance of clear communication and gradual exit (example: Fed) and adoption of macro-prudential policies, especially in emerging markets (e.g., minimum liquidity ratios).
- Fiscal policies (growth-friendly and job-friendly)
- Preserve gains from efforts to reduce excessive deficits and bring debt under control; use sensible pace and composition of consolidation attuned to country circumstances.
- Well-targeted measures can boost growth: reforms to address tax evasion, support more efficient public spending, and reduce burden on labor (lower payroll taxes).
- Reform of energy subsidies, estimated at about US$2 trillion, can generate revenue; these subsidies mostly benefit the relatively affluent and harm the environment.
- Fiscal measures should be growth-friendly, job-friendly, and environment-friendly—but cannot substitute for structural reforms.
- Structural reforms (labor and product markets)
- Scale of challenge:
- More than 200 million people around the world are still unemployed, of which 75 million are youth.
- Except for the top 1 percent, most people have seen incomes stagnate or shrink in recent years.
- Policy levers:
- Well-designed active labor market policies and training programs to bolster demand for workers—examples include Australia, Germany, and Sweden.
- Increase labor participation, especially of women—example: Japan expanding day-care centers; similar policies in Korea.
- Open product and service markets where professions are closed to competition.
- Improve flow of credit via insolvency regimes to help banks and private sector deal with debt burdens so credit can flow.
- Public investment in infrastructure
- Crisis has depressed growth and investment; for G-20 countries, GDP is 8 percent lower than it could otherwise have been; shortfall in investment nearly 20 percent below trend.
- Public capital stocks were depleted as public investment scaled back by a quarter—from about 4 percent of GDP in the 1980s to 3 percent today.
- Example: American Society of Civil Engineers estimates 99 percent of the major roads in Washington DC are in poor condition.
- Global estimates place infrastructure spending needs at US$6 trillion over the next 15 years.
- Efficient infrastructure spending is crucial; integrating lower emission standards into infrastructure investment would cost about 4.5 percent of total projected spending.
- Historically low interest rates present an opportunity: investment can be good for growth, jobs, and the environment.
Concluding remarks on the new multilateralism and role of the Fund
- Multilateral cooperation examples
- G20 coordination, including providing additional resources to the IMF and strategies to lift medium-term growth by a collective 2 percent of GDP by 2018.
- IMF adaptations over 70 years: revamped lending toolkit, more flexible instruments for liquidity and emergency access, and introduction of zero-interest loans for low-income members.
- IMF financial assistance: close to US$700 billion in commitments over the last 6 years.
- Analysis, capacity building, and governance
- New IMF analysis on capital flow management, spillovers, inequality, fiscal implications of climate change, and the role of women in the workforce.
- Capacity building and technical assistance now the IMF's largest service: almost 90 percent of the IMF's 188 members have benefited.
- IMF Massive Open Online Course (MOOC): almost 2000 graduates in the last year.
- Governance reform: majority of members have approved the 2010 Quota reform; awaiting approval by the United States.
- Institutional mission
- IMF continues to adapt to safeguard stability, help countries through economic fallouts, and forge cooperative solutions to global problems—aiming to generate momentum to overcome the "new mediocre."
The Challenge Facing the Global Economy: New Momentum to Overcome a New Mediocre, by Christine Lagarde, October 2, 2014.