The steering committee of the International Monetary Fund has called on its member countries to adopt more “growth friendly” spending in order to boost the slowing global economy.
Christine Lagarde, the managing director at the IMF, has said that even though the markets have calmed since February, reducing stress levels at the World Bank and IMF spring meetings, the outlook is still unpredictable and riddled with risks from low demand, a potential Brexit and low commodity prices.
“There was not exactly the same level of anxiety but I think there was an equal level of concern, and a collective endeavour to identify the solution and the responses to the global economic situation.”
She said that the spring meetings with the World Bank, G20 finance ministers and governors of central banks, served as “collective therapy” to tackle the worrying outlook. Last week, for the fourth time this year, the IMF cut its global growth forecasts.
The IMFC (International Monetary Fund Committee) said:
“Downside risks to the global economic outlook have increased since October, raising the possibility of a more generalised slowdown and a sudden pull-back of capital flows.”
The committee also said:
“Refrain from all forms of protectionism and competitive devaluations, and to allow exchange rates to respond to changing fundamentals”.
They went on to say that a more “forceful and balanced policy mix” was required in order to kickstart growth and prevent deflation, and that more than just monetary policy was needed. It added that “growth-friendly fiscal policy is needed in all countries”.
The chairman of the Swiss National Bank, Thomas Jordan, believes that policymakers in Europe, China and Japan, are finally beginning to appreciate the need for structural reform and higher levels of fiscal stimulus.
This is easier said than done. These structural reforms are difficult to pass through parliaments... there is a certain risk that this will be postponed.”
The committee said that the Fund should look at its lending tools “to explore ways to strengthen its approach to helping members manage volatility and uncertainty – including through financial assistance, also on a precautionary basis.”
Lagarde has laid out these calls a lot in recent times. Speaking at the Goethe University in Frankfurt, Lagarde said:
“The good news is that the recovery continues. We have growth. We are not in a crisis. The not-so-good news is that the recovery remains too slow, too fragile, and risks to its durability are increasing.
“We are on alert, not alarm. There has been a loss of growth momentum. However, if policymakers can confront the challenges and act together, the positive effects on global confidence, and the global economy, will be substantial.”
The outlook for the global economy had weakened significantly in the last six months, due to the economic slowdown in China, falling oil prices and the possibility of financial tightening for many countries, Lagarde continued. “Emerging markets have largely driven the recovery and the expectation was that the advanced economies would pick up the growth baton. That has not happened.”
She went on to say that moods have brightened considerably since the tumultuous start to year that was seen on the financial markets. Ms Lagarde accredited this to increased support from the ECB (European Central Bank), a slowdown of interest rate increases in the US, a slight rallying in oil prices and lower levels of capital flowing away from China.
However, “downside risks remain and have probably increased”, she went on to say, these included the aftermath of the economic crash seen in the economies of developed nations such as high debt, low investment, low inflation, low productivity and, in some cases, high unemployment. In developing nations these risks took the shape of lower commodity prices, erratic flows of capital and increased levels of corporate debt.
Lagarde said that each of these threats had the potential to impact upon other areas “with greater frequency and force than ever before”. These comments came shortly after a warning from the IMF that China’s impact upon the stability of the global economy would only continue to grow in the years to come. They continued by saying that this fact makes it all the more important that communication channels with Beijing are kept open and transparent.
Lagarde continued her speech by pointing to increased risks to financial stability and a slowdown in global trade.
She echoed the calls of other international bodies for governments to start taking action to secure economic growth, instead of depending upon central banks to hold interest rates back and continue printing money. This came after the IMF called on finance ministers around the world to start increasing their levels of public spending. It continued by saying that should the British economy slow anymore, the government should pull back in its austerity measures.
She pointed to Japan, who are investing more money in childcare to enable more women to work, and India, which slashed its spending on energy subsidies in order to invest in more hospitals and schools. She said that all countries in a position to be able to cut taxes or invest should be doing so.
“Of course, countries with high and increasing debt, and elevated sovereign spreads need to pursue further fiscal consolidation. But others may have room for fiscal expansion.
“Countries should also prepare fiscally smart contingency measures that can be implemented promptly should downside risks materialise.”
This was echoed by the World Economic Outlook that the Fund released in January:
“Monetary easing in the euro area and Japan is proceeding broadly as previously envisaged, while in December 2015 the U.S. Federal Reserve lifted the federal funds rate from the zero lower bound. Overall, financial conditions within advanced economies remain very accommodative. Prospects of a gradual increase in policy interest rates in the United States as well as bouts of financial volatility amid concerns about emerging market growth prospects have contributed to tighter external financial conditions, declining capital flows, and further currency depreciations in many emerging market economies.”
Lagarde continued by raising her fears over the fact that, in the face of international threats such as terrorism, inequality, health scares and the refugee crisis, many voters and policymakers were becoming more nationalistic and protectionist.
She warned that countries should avoid doing this and should instead increase their levels of cooperation; Lagarde has recently come out in strong favour of the UK remaining in the EU.
“Frustrations are leading people to question established institutions and international norms.
“To some, the answer is to look inward, to somehow unwind these linkages, to close borders and retreat into protectionism. As history has told us time and again, this would be a tragic course. The answer to the reality of our interconnected world is not fragmentation. It is cooperation.”
In its most recent forecast for the global economy in January, the International Monetary Fund reduced its forecasts for economic growth over the next two years. They said that the recovery could fail altogether if the upcoming challenges are not dealt with properly. It is predicting growth of 3.4% in 2016.
“Global growth, currently estimated at 3.1 percent in 2015, is projected at 3.4 percent in 2016 and 3.6 percent in 2017. The pickup in global activity is projected to be more gradual than in the October 2015 World Economic Outlook (WEO), especially in emerging market and developing economies.”
Looking back over last year, the report read:
“In 2015, global economic activity remained subdued. Growth in emerging market and developing economies—while still accounting for over 70 percent of global growth—declined for the fifth consecutive year, while a modest recovery continued in advanced economies.”