Sluggish world economy vexes policymakers at Fed, China crossroads
LIMA — Global policymakers used nearly all their tools to get the world economy out of a stall six years ago. What is vexing them now is how to shift it into higher gear.
LIMA — Global policymakers used nearly all their tools to get the world economy out of a stall six years ago. What is vexing them now is how to shift it into higher gear.
The prospect of the world’s biggest economy being healthy enough for its central bank to raise interest rates for the first time in nearly a decade would usually be reason to cheer. So might efforts by the next-largest to move towards more balanced growth.
A sluggish and uneven global recovery is making these turning points — the Federal Reserve’s plan to raise rates and a slowing of China’s once high-flying economy — harder to digest for central bankers and finance chiefs, who met over the weekend in Lima. Clouding the picture is lackluster investment from companies sitting on cash, still too reluctant to deploy the capital that typically drives recoveries.
“The world is not in crisis, but there’s a great sense of unease, and that sense of unease explains why globally, almost everywhere, private investment is much weaker than you would expect at this stage in the cycle,” Singapore Deputy Prime Minister Tharman Shanmugaratnam said in the Peruvian capital at the International Monetary Fund’s annual meeting, which wrapped up on Sunday.
The last time the Fed was preparing to begin a tightening cycle, in 2004, the United States economy was poised to grow 3.8 per cent on the year, while global output was on track to expand 5.2 per cent, according to IMF data. Policymakers can only dream of such bounty now. A slowdown in emerging markets driven by weak commodity prices forced the IMF last week to cut its outlook for global growth in 2015 to 3.1 per cent, the weakest since 2009, from a July forecast of 3.3 per cent. The Washington-based fund raised its projection for US growth this year to 2.6 per cent, from 2.5 per cent in July.
“We carry with us a backpack called the Great Moderation,” said Mr Stefan Ingves, Governor of Sweden’s central bank, referring to the period of steady growth and low inflation that began in the mid-1980s and ended during the financial crisis.
“Everything we’ve done since is trying to fix problems, hoping that we get back to another Great Moderation. The hard part is that it’s very difficult to be sure things will normalise in that particular way.”
IMF officials say many emerging markets are well prepared for a financial shock, having built up foreign-currency reserves and adopted flexible exchange rates. They say the added cushion could well prevent a replay of the crises that roiled Latin America during the early 1980s and Asia in the late 1990s.
But with China slowing and countries such as Brazil and Russia in recession, emerging markets are suffering from a “broken growth model”, Mr David Lubin, head of emerging markets economics at Citigroup Global Markets, said at an Institute of International Finance conference in Lima.
To be sure, the Fed’s move to tighten monetary policy and China’s shift to more consumption-driven growth may turn out to be welcome developments, Brazilian Finance Minister Joaquim Levy said.
“My impression of the discussions is that they started with a somewhat gloomy mood, but people have realised that the risks we’re facing are somewhat positive problems, (because they point to) most economies moving away from the old problems and starting a new phase,” he said.
Fed Vice-Chairman Stanley Fischer said on Sunday that the US economy may be strong enough to merit an interest-rate increase by year end, while cautioning that policymakers are monitoring slower domestic job growth and global developments.
For some, the day of Fed liftoff cannot come soon enough. “Our recommendation is, just do it,” said Mr Angel Gurria, secretary-general of the Organisation for Economic Cooperation and Development. “Take the mystery out of the thing.” BLOOMBERG