IMF REPORT Emerging Market Slowdown Adds to Global Economy Pains The global economy is growing more slowly than expected, with risks increasing especially in emerging markets, says the IMF. Global growth is now projected at 3.1 for 2013 and 3.8 percent for 2014, a downward revision of ¼ percentage point compared with the April 2013 WEO forecast. Risks, old and new, still on the downside Financial market volatility increased globally in May and June after a period of calm since last summer. Emerging market economies have generally been hit hardest. Recent increases in advanced economy interest rates and asset price volatility combined with weakness in emerging market domestic activity led to some capital outflows, equity price declines, rising local yields, and currency depreciation in the latter. The WEO forecast assumes that the rise in volatility and yields will partly reverse, as it largely reflects a one-time reassessment of risks by investors based on the weaker growth outlook for these economies and temporary uncertainty about the U.S. exit from monetary policy stimulus. But if the underlying vulnerabilities persist and financial market volatility remains high, this could increase capital outflows and lower growth in emerging market economies. More generally, downside risks, old and new, still dominate the outlook. The WEO Update highlights increased risks of a longer growth slowdown in emerging market economies. These risks reflect the possibility of capital flow reversals and the possibility of more protracted effects of domestic capacity constraints, slowing credit growth, and weak external conditions. Policies to generate strong growth Weaker growth prospects in emerging markets and new risks worldwide are challenging global growth, employment, and rebalancing. The report underscores the need for policymakers everywhere to increase efforts to address these challenges and restore robust growth. The policy priorities for the major advanced economies that were outlined in the April WEO report remain relevant. These economies should continue to pursue a policy mix that supports near-term growth, anchored by measures to put their public debt levels on a sustainable path over the medium term. Clear communication on the eventual exit from accommodative monetary policies will help reduce volatility in global financial markets. In the euro area, a bank asset review should identify problem assets and quantify capital needs, supported by direct recapitalization by the European Stability Mechanism where appropriate. Building on recent agreements, policymakers should also make progress toward a fuller banking union, including through a strong Single Resolution Mechanism. Although current conditions and vulnerabilities vary across emerging market and developing economies, weaker growth and risks of capital outflows have raised new policy challenges. There is a risk that the growth slowdowns in some of these economies could reflect lower-than-expected potential output. So these economies may have less budgetary room than previously estimated. In general, monetary policy easing should thus be the first line of defense against downside risks. But real policy rates are low already, and capital outflows and the effects of further exchange rate depreciation on inflation may constrain further rate cuts. And many economies also face some financial stability risks given threats to asset quality from weaker growth and earlier rapid credit expansion. Given these challenges, it may be necessary to upgrade regulatory and supervisory frameworks. Finally, there is a need for structural reforms across all major economies, to lift global growth and support global rebalancing. As in the past, this means steps to raise domestic demand in economies with large current account surpluses (such as China and Germany) and measures that improve competitiveness in economies with large current account deficits. imf.org/external/pubs/ft/survey/so/2013/NEW070913A.htm
Posted on: Tue, 16 Jul 2013 20:34:58 +0000
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