After the Crisis: The Outlook and the Long View
IMF News, November 8, 2017
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- Published: November 8, 2017
A Strengthening Recovery
- Global growth outlook (World Economic Outlook forecasts): 3.6 percent growth this year and 3.7 percent in 2018.
- Advanced economies are leading the recovery; most emerging markets are also growing.
- Both consumption and investment are experiencing an upswing; import-intensive investment has helped accelerate trade, which for the first time in several years is growing faster than GDP.
- Inflation remains weak in many countries, reflecting slow wage growth and remaining slack in some advanced economies.
- About 25 percent of the world, in per capita GDP terms, is not growing; most of these countries are commodities exporters of the developing world, particularly oil producers.
- Accommodative monetary policies since the crisis have been instrumental in restoring growth; the IMF supports continuation where core inflation remains below targets and supports the pace of normalization by the Federal Reserve and other central banks.
- Risks highlighted: rising asset prices, increased exposure to credit, maturity and liquidity risks, subdued volatility suggesting investor complacency, and rising corporate and sovereign debt.
The Long View on Interest Rates
- Observation: a long-term decline in real interest rates over the past three decades in the advanced economies.
- Two key structural changes examined:
- Demographic changes: greater longevity and rapid aging of societies as birth rates drop; rising longevity is propelling an increase in savings as households prepare for longer retirement (notably in Japan and euro area countries).
- Declining productivity growth since the global crisis: factors include waning IT-driven boom, slowing global trade, weaker capital accumulation, and in some countries, population aging weighing on productivity. Lower total factor productivity will dampen demand for credit and financial intermediation.
- Caveat: technological surprises (positive or negative) remain possible; fintech could substantially disrupt financial services.
- Implication: demographic change and declining productivity growth could lower steady-state economic growth and exert downward pressure on nominal and real interest rates.
Challenge to Business Models
- Prolonged low rates and a flatter yield curve (associated with lower short-term rates) would strain profits and survivability of financial institutions.
- Expected sectoral impacts:
- Banks: tail-risk exposure likely to increase as banks reach for higher yields; smaller banks may face falling demand for business lending and difficulty competing for aging-population services, likely resulting in continued consolidation (example: Japan over past two decades).
- Insurance: pressure on capital from funding liabilities taken on during past higher-rate periods; many business lines could struggle to turn a profit in slower-growth, lower-rate environment.
- Pensions: defined-benefit plans may become less attractive than defined-contribution plans, which offer more portability.
- Asset managers: investors less inclined to pay high management fees; demand for passive index funds likely to continue growing.
Policy Implications
- Regulatory and supervisory priorities:
- For banking sector: provide and sustain legal and regulatory frameworks that limit excessive risk taking amid lower returns.
- Increase supervision and regulation of the asset management industry as its market share expands.
- Strengthen macroprudential policies with clear assessment of systemic risks.
- Recommended macroprudential actions and calibrations:
- Introduce or tighten borrower-based measures to slow fast-growing overvalued segments.
- Bank stress tests must assume more stressed-asset valuations.
- Increase capital requirements for banks more exposed to vulnerable borrowers.
- Consider debt-service-to-income and loan-to-value limits where rising household debt is a concern.
- For nonfinancial corporate leverage: sectoral capital requirements and risk weights on foreign currency credits.
- Increase focus on regulation of nonbank institutions to limit risk migration and excessive capital market financing; greater transparency is essential.
- Emerging markets considerations:
- Emerging markets benefited from a decade of low interest rates but many have a buildup of leverage and vulnerabilities.
- Example: increase of Chinese debt since 2007; China has taken steps to improve risk management and address maturity and liquidity risks under shadow banking, but these measures must remain a priority and be accompanied by slower credit growth.
- Overarching message: strengthen defenses now to be better prepared for future vulnerabilities and for longer-term structural shifts affecting interest rates.
Speech by IMF First Deputy Managing Director David Lipton, November 8, 2017.