Tuesday, September 2, 2014

Re-Empowering the Global Economy

WASHINGTON, DC – The global economy in 2013 remained suspended between the poles of hope and uncertainty. While recovery gained momentum, particularly in some advanced economies, the world economy is not yet flying on all engines – and is likely to remain underpowered next year as well.

The International Monetary Fund’s latest forecast puts global GDP growth at 3.6% in 2014, which is decent, but still below potential growth of around 4%. In other words, the world could still generate considerably more jobs without fueling inflationary pressure.

This means that the IMF’s members – whether advanced, emerging-market, or developing economies – have more work to do. A strong and lasting recovery that lifts all countries and all peoples requires policymakers to press ahead on all fronts – fiscal, structural, and financial. At the same time, the international community must reinvigorate its efforts to strengthen cooperation through the G-20, the IMF, and other actors. Indeed, only through such collaboration can we overcome the lingering impact of the global crisis.

We have certainly avoided the worst-case scenario (Great Depression II) over the past five years, thanks to the efforts of global policymakers – particularly the determination of central banks to keep global interest rates low and to support the financial system, coupled with fiscal stimulus in some countries. But the time has come to push further, including by using the room created by unconventional monetary policies to implement structural reforms that can jump-start growth and create jobs.

What happens in advanced economies is central to global prospects; and, despite their stronger performance recently, the risks of stagnation and deflation continue to loom large. Central banks should return to more conventional monetary policies only when robust growth is firmly rooted.

The United States has long been the main engine driving the global economy, and private demand there has regained vigor. But key challenges lie ahead. For example, it is vitally important that policymakers follow through on the recent budget agreement and end the political wrangling over the country’s fiscal future. Greater certainty about the direction of policy could restore growth to a level that would lift the entire global economy.

In Japan, recovery has been spurred by the mix of aggressive monetary and fiscal policies known as “Abenomics.” This is an important development. The challenge now is to agree on medium-term fiscal adjustments and implement the structural reforms – including deregulation of product and service markets and measures to boost the share of women in the workplace – that are needed to give growth a firm foundation and finally banish the specter of deflation.

Europe is also at a key juncture. The eurozone is finally showing signs of recovery, but growth is uneven and unbalanced. While many countries are doing well, demand in general remains weak, and unemployment in the periphery remains obstinately high, particularly for young people.

One area of uncertainty for Europe is the health of its banks. The forthcoming stress tests and asset-quality review can help restore confidence and advance financial integration, but only if they are conducted well. Europe also needs to boost demand, strengthen its financial and fiscal architecture, and put in place structural reforms to ensure sustained growth and job creation.

Over the past half-decade, the emerging markets have been in the vanguard of economic recovery: together with developing countries, they have accounted for three-quarters of global GDP growth. But these economies’ momentum slowed in 2013, as uncertainty about the timing of monetary-policy normalization in the US coincided with doubts about the sustainability of their growth path.

While the worst fears have faded, the emerging economies face new policy challenges. In responding to slower demand, policymakers must be wary of financial excess, especially in the form of asset bubbles or rising debt. They should also focus on strengthening financial regulation, in order to manage credit cycles and capital flows more effectively, and on reestablishing fiscal room for maneuver.

Low-income countries have been a bright spot for the global economy over the last five years as well. They proved resilient in the face of crisis, and many – especially in Africa, where annual output rose by about 5% in 2013 – are enjoying strong growth. Now is the time to build on these gains, primarily by strengthening these countries’ capacity to raise revenues. With demand from emerging markets weakening, low-income countries should bolster their defenses against a serious downturn, even as they continue to focus their spending on key social programs and infrastructure projects.

Middle Eastern countries in transition face additional challenges in the form of social instability and political uncertainty. These problems should be addressed by laying the groundwork for dynamic, transparent economies, promoting more inclusive growth, and ensuring continued support from the international community.

While challenges vary by country and region, many common problems must be addressed in the years ahead. Too many countries face a legacy of high public and private debt, fiscal and current-account imbalances, and growth models that are unable to generate enough jobs. The international community also needs to complete the regulatory reforms required to create a safer financial system that better supports the needs of the real economy.

These are not abstract challenges. Only by addressing them can we ensure future prosperity at a time when billions of people have rising aspirations – to find jobs, to rise out of poverty, and to one day join the global middle class.

In 2014, we need to take the steps that would help make this dream a reality. The IMF is committed to working with its 188 member countries to define and implement the policy measures that can power the engines of growth – and lift all people to renewed prosperity.

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  1. CommentedGerry Hofman

    "Europe needs to put in place structural reforms to ensure sustained growth and job creation" . These kinds of statements just get me every time. We all know that traditional manufacturing has moved from the west direction Asia in a really big way the last few decades, and yet our leaders just keep coming out with these bland and meaningless statements about 'job creation'. I think they just keep coming up with generalities because they haven't got the faintest how this could be achieved, so the idea is to keep on applying the whip in the hope the horse will find the track home by itself. Applause for initiative and foresight.

  2. CommentedMargaret Bowker

    Christine Lagarde has set a worthy ambition that of enabling increasing numbers of people, as many as possible, to join the global economic middle classes; and 2014 is an important year in this respect. Work is already in hand on unnecessarily restrictive regulation and that essential to prevent the repetition of past mistakes. Structural reform now seems to be part of every policy maker's speech. Central banks, the institutions taking the initiative in the crisis, will hardly contemplate risks whilst coming out of it. Perhaps in the case of the Federal Reserve, leaving tapering temporarily on hold in January, whilst waiting for the months's job creation and unemployment figures to come out and put those in December into perspective. Similarly Congress will always have the nation's best interests in mind. And the reform of the operation of the EU will lead to a considerably more effective institution, socially and economically, with more decision making left to the member states. The UK is bringing forward debate on this issue and its progress is being followed across the institution; and even supported. Referendum bill or EU law veto, both debates have the potential to affect the approaching reform negotiation. Perhaps a set number of opt outs a year on regulation, perhaps not, but this will be a year for ideas and proposals. A very thought-provoking article.

  3. Commentedhari naidu

    Suggest IMF and IBRD consider ways and means to empower G20 to develop a Secretariat with competence to manage and propagate administrative resolution of outstanding political/economic constraints to global trade and development. Above all to restrict G20 to areas of agreed global issues with real potential solution in the medium term.

    Pascal Lamy is currently out of a job, and may provide the type of leadership required to move G20 forward towards resolution of some serious global issues.

  4. CommentedJonathan Lam

    Gamesmith94134: Re-Empowering the Global Economy
    “While recovery gained momentum, particularly in some advanced economies, the world economy is not yet flying on all engines”, it is also true when you scrutinized the micro economic growth by its regions; and I found the 3.6% global growth is too optimistic especially when the QE is being tapered. The Fed is running a $4 trillion debt on its book, it did not set it policy because of buying back its long-term debt and short-term debt may affect the interest rate and it also depends on how China performs. I assume China would be the secondary minefield after it released it 4 trillion RMB for credits to relieve the current run-off of Cash flow. So, the monetary policy is the questionable on its value and balance when timing is short changed by the employment and inequality, or deflation and displacement on asset or currency will occur; which are not being synchronized. In such event, assets or stock will roll and rock; and it is for the developed nations. As much of recent run on the 50-75% discount sales in American, its 4.1% growth undercut it profit margin and PMI dearly than expected, it put the 3.6% global growth in jeopardy after it merchandize is replaced in the coming year. In addition, the competition of the ‘Made in USA’ to ‘China made’ would not be cheaper after adjustment to inequality in labor reform.
    As for the Emerging Market nations or EU, rising interest rate could be the only survival tool to relieve the thirst of cash flow; then, the global inflation began that follow the heat waves on commodity and labor if the global economy will ever grow. If ever inflation or devaluation will not happen, I see the 2.4% global economical growth, and China’s 7.5% may down to 4.5% as well after it industrial and financial reforms; it is my imagination with less on calculation of how 6-6.5RMB to a dollar and the shrinking on the ETF would affect the domestic growth to China, for which, is current as IMF and others agreed.
    I would agree while challenges vary by country and region, the international community also needs to complete the regulatory reforms required to create a safer financial system that better supports the needs of the real economy. Perhaps, we must realize the G20 of the 188 nations is not sufficient for the real economy as each will not survive to the changing moment of time. This is time for the global financial reform which we should innovate the regional banking system to provide its own need and development; since international banking may not be the rule of the thump, and we must have another mechanism for its regional growth and international supervision. I would seriously recommend the World Bank to take charge of the insurance and regulations of the cash flow and provide a regional standard and assistance for its development; and each trade associations like North America, OAS, ASEAN, African Union and OCED to lead the European Nations to develop it firewall to curd discrepancy of the volatile exchange rate and leadership to bring assistance and growth to its regions. Perhaps, it would take only 1% on any regional transfer to organize the funding on the monetary insurance like FDIC and contingency funding for most of the regional growth or disasters; and it would levitate the currency warfare and enhance the sustainability of the effected banking if each will give its effort to make it work.
    Nonetheless, I see the asset group may level with it 2008’s; but the rise of cost is too much to bear for the middle class; especially for governmental program, austerity shrank its level of jobs under budgeting. Even entrepreneurs suffers, they are cut significantly from the institutionalized standard and development, and many come short to raise a sufficient funding to establishing its company to hire. It is my fear of these bubbles will burst if only if there is another deflation arrives.
    It really worry me of the 2008 level than 2014 one; they look the same to me. How does the displacement go if the middle class does not earn enough throughout the year? Or, once again the EU banking sinks as the interest rate rises. Therefore we need a reform or mechanism to recapture growth. We’re better off if we can have a firewall before the global economy is being contaminated.
    Can the World Bank get its 188 votes rather than G20? This is empowerment of the global economy.

    May the Buddha bless you?

  5. CommentedJose araujo

    First and foremost, we have certainly not avoided the Great Depression II. Product destruction and unemployment are only comparable in modern time to the great depression, and other news for Christine Lagarde, actually the world recovered faster from the Great Depression faster then we did now, and one of the reasons is the incompetence of our politics, Christine Included.
    Second on the son called structural reforms Christine listed more deregulation, well here are some news for you Christine, and it was the lack of regulation that led us into this situation, not excessive regulation of markets.
    Third, which countries in Europe are doing well? Doing well like in still breathing after a major cardiovascular accident, and how would demand not remain weak on periphery countries, if the organism you head are forcing them to do so….
    Christine Largarde shows in this piece that she has learned nothing from her actions. She’s now petting herself on the back from losing weight after amputating a limb….
    In a moment where the rise of inequality has no paramount in recent history, She’s worried about asset bubbles and debt levels and growth models (i.e. excessive wages), meaning… more austerity, more wage decreases, all in all more of the same that led us into this situation…

  6. CommentedJoshua Ioji Konov

    If the IMF does not reevaluate its policies toward less developed markets i.e. economies the regression of a slow growth will continue. The role of a debt collector as it is should evolve into a role of development promoter, however, it is very hard to stand up against the establishment and easier to stand down, indeed.

  7. CommentedEric Nordin

    Given the intransigence of Washington, it is important that economists and consumers alike, decouple political inertia from economic growth - the former does not necessarily beget the latter. Although government policies can be crucial toward initialing economic growth, market forces can often overcome political shenanigans; take Turkey for example.

  8. CommentedArmen Papazian

    Re-Empowering the species and the global economy needs to involve a transformation in our financial imagination. This is the Solar century, and our current economics does not do justice to an immense and miraculous cosmos. http://www.jbs.cam.ac.uk/media/2013/our-financial-imagination-and-the-cosmos/#