Apr

11

 In regards to the IMF, I would highlight the salient points from a recent speech by David Lipton, the number 2 at the IMF:

The weak recovery is taking place in the context of unresolved legacies. In many parts of Europe, for instance, sovereign and private sector balance sheets remain highly leveraged and banks' non-performing loans high. In the US, aging-related spending pressures and unfulfilled infrastructure needs diminish economic prospects. And in Japan, deflation is putting the recovery at risk.

At the same time, we are witnessing an emergence of new risks. The global economic slowdown is hurting bank balance sheets and financing conditions have tightened considerably. In emerging markets, excess capacity is being unwound through sharp declines in capital spending, while rising private debt, often denominated in foreign currency, is increasing risks to banks and sovereign balance sheets. Concerns about the global outlook have weighed heavily on world financial markets. The decline in equity price indices in 2016 so far this year has averaged over 6 percent, implying a loss of global market capitalization of over US$ 6 trillion (or 8.5 percent of global GDP). This is roughly half the US$ 12.3 trillion loss incurred in the most acute phase of the global financial crisis. Some Asian markets, such as in China and Japan, have been particularly hard hit, with losses of over 20 percent since the beginning of the year. Meanwhile, emerging market currencies have weakened, while their sovereign credit spreads have continued to widen—in Latin America and Africa by over 300 basis points over the past year.

What may be most disconcerting is that the rise in global risk aversion is leading to a sharp retrenchment in global capital and trade flows. Last year, for example, emerging markets saw about $200 billion in net capital outflows, compared with $125 billion in net capital inflows in 2014. Trade flows meanwhile are being dragged down by weak export and import growth in large emerging markets such as China, as well as Russia and Brazil, which have been under considerable stress.

Furthermore, inflation has fallen to historical lows. Headline inflation in advanced economies in 2015, at 0.3 percent, was the lowest since the financial crisis, and in emerging markets core inflation remains well below central bank targets. Why should we be concerned about these developments? First, because protracted low global demand, and adverse feedback loops between the real economy and markets may generate additional deflationary pressures, putting us at risk of secular stagnation. Second, and equally relevant, is that labor supply and labor productivity growth have fallen considerably over the past decade, further aggravating these adverse dynamics. While some aspects of the weak recovery are clear, we and many others in the policy world and in the markets are still debating and analyzing the role and the severity of several key transitions now underway:

• How will China's transition—with the deceleration in export oriented manufacturing activity and a pickup in sectors satisfying household demand —alter patterns of global trade and investment?

• Will the transition to lower oil and commodity prices be a plus, as predicted, or a minus? The expected pickup in consumption in commodity importers has been weaker than expected, possibly reflecting continued deleveraging in some of these economies and a limited pass-through of price declines to consumers. At the same time, declining prices have reduced investment in extractive industries, pushed some producers to or beyond the edge of profitability, and weighed on growth prospects for commodity exporting countries.

• Will geopolitical tensions, the related refugee crisis, and global epidemics further increase uncertainty and weigh on economic activity? With all these uncertainties, even our latest baseline for global growth may no longer be applicable. In any case, the downside risks are clearly much more pronounced than before, and the case for more forceful and concerted policy action, has become more compelling."


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