The world awaits those crucial IMF, World Bank meetings this week
THE International Monetary Fund (IMF) has released its Global Economic Outlook ahead of the spring meetings of the Fund and the World Bank. Its prognosis is not exciting.
The global economy will grow but will remain sluggish. China's growth appears to be slowing with adverse implications for commodity prices and those countries that export to China. Several emerging market economies are turgid despite a boost to output from stronger exports. Japan continues to have problems and the United States has still not resumed its role as an engine of growth for the world economy.
All told, global growth is projected to increase to about three per cent in 2014, marginally above the three per cent attained in 2013; and four per cent in 2015.
The recovery is still weak and there are significant risks. The possibility of short-term capital outflows, higher interest rates, and sharp currency depreciation in emerging economies remain a concern. A major unknown will be the impact on the global economy of the tapering of monetary policy in the United States. Tapering should proceed at a measured pace, while preserving the long-run growth potential of the US economy.
The global economic crisis which erupted in late 2008 had its origins in the US economy's implosion of the sub-prime market. Just as it begins to experience what it hopes is a nascent recovery, which would be good for the world economy, the United States Federal Reserve has commenced "tapering" its quantitative easing of monetary policy which was aimed at stimulating economic growth in the US economy.
Tapering will increase interest rates and could cause a redirection of global capital flows to the US and to that extent there will be less available to the developing countries. The reduced global liquidity arising from the US Federal Reserve's gradual tapering of its stimulus measures is having an adverse impact on the capacity of developing countries to garner financing for their current account and fiscal deficits by resorting to international financial markets.
The anaemic recovery in advanced economies reflects the policy mix adopted in response to the recent economic crisis. They have been ineffective compared to those implemented during previous financial crises. The implication is that there has to be a shift to policies which rely less on austerity and more on judicious stimulus. US tapering may be an example of premature withdrawal from stimulus.
Trade and investment by China and the emerging market economies of Asia will have a positive effect on commodity-exporting countries in Africa and Latin America but this alone cannot drive global growth.
At the IMF meetings this week the international community must design bold new policies urgently needed to moderate the adverse effects of low global growth and to promote and accelerate robust economic recovery.
The advanced economies should be aware of their responsibilities to the rest of the world and pursue policies which will be beneficial to all countries. They must avoid premature withdrawal of monetary accommodation as fiscal balances continue consolidating and, in particular, the pace of policy actions in the US.