Global policy makers used nearly all their tools to get the world economy out of a stall six years ago. What’s vexing them now is how to shift 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 toward 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 Sunday.
Great Moderation
The last time the Fed was preparing to begin a tightening cycle, in 2004, the US economy was poised to grow 3.8% on the year, while global output was on track to expand 5.2%, according to IMF data.
Policy makers 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%, the weakest since 2009, from a July forecast of 3.3%. The Washington-based fund raised its projection for US growth this year to 2.6%, from 2.5% in July.
"We carry with us a backpack called the Great Moderation," said 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," he said during a panel discussion in Lima.
Excessive Borrowing
The IMF also warned that over-borrowing by companies has left developing economies vulnerable to financial stress and capital outflows. In 2015, emerging markets will see their first year of negative capital flows since 1988, as investors pull US$541 billion ($719 billion) from countries such as China and Brazil, the Institute of International Finance said in a report last week.
Markets are reflecting the lack of a clear direction. The MSCI Emerging Markets Index of equities, after slumping for five straight months, is up 8.5% this month. Bloomberg’s USD Emerging Market Sovereign Bonds Index last week staged its biggest weekly gain since September 2013, after falling to a nine-month low last month.
"I wouldn’t paint a dark picture," IMF Managing Director Christine Lagarde told reporters in Lima. "I would simply insist on the policy mix that can be applied in order to move from an uneven and modest recovery, which has decelerated, to something that is definitely stronger."
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 during the late 1990s.
‘Broken’ Models
But with China slowing and countries such as Brazil and Russia in recession, emerging markets are suffering from a "broken growth model," David Lubin, head of emerging markets economics at Citigroup Global Markets, said at an IIF conference in Lima.
"Historically, emerging-markets crises were located in the balance of payments," Lubin said. "This is not. This is a growth crisis."
Willem Buiter, chief economist for Citigroup, is predicting a global recession will start in 2016, led by China.
The IMF left its forecast for China’s growth at 6.8% this year and 6.3% in 2016. Still, the fund warned the “cross-border repercussions” of slowing Chinese growth “appear greater than previously envisaged.”
"I’m getting to the point where I don’t see concerns about China going away -- maybe ever," said David Fernandez, head of fixed-income research for the Asia-Pacific at Barclays Bank PLC.
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.
Turning Optimistic
"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 Sunday the US economy may be strong enough to merit an interest-rate increase by year end, while cautioning that policy makers are monitoring slower domestic job growth and international developments. “We remain committed to communicating our intentions as clearly as possible -- but not more clearly than the facts warrant,” he said.
For some, the day of Fed liftoff can’t come soon enough.
"Our recommendation is just do it," said Angel Gurria, secretary-general of the Organization for Economic Cooperation and Development. "Take the mystery out of the thing."
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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 toward 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 Sunday.
Great Moderation
The last time the Fed was preparing to begin a tightening cycle, in 2004, the US economy was poised to grow 3.8% on the year, while global output was on track to expand 5.2%, according to IMF data.
Policy makers 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%, the weakest since 2009, from a July forecast of 3.3%. The Washington-based fund raised its projection for US growth this year to 2.6%, from 2.5% in July.
"We carry with us a backpack called the Great Moderation," said 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," he said during a panel discussion in Lima.
Excessive Borrowing
The IMF also warned that over-borrowing by companies has left developing economies vulnerable to financial stress and capital outflows. In 2015, emerging markets will see their first year of negative capital flows since 1988, as investors pull US$541 billion ($719 billion) from countries such as China and Brazil, the Institute of International Finance said in a report last week.
Markets are reflecting the lack of a clear direction. The MSCI Emerging Markets Index of equities, after slumping for five straight months, is up 8.5% this month. Bloomberg’s USD Emerging Market Sovereign Bonds Index last week staged its biggest weekly gain since September 2013, after falling to a nine-month low last month.
"I wouldn’t paint a dark picture," IMF Managing Director Christine Lagarde told reporters in Lima. "I would simply insist on the policy mix that can be applied in order to move from an uneven and modest recovery, which has decelerated, to something that is definitely stronger."
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 during the late 1990s.
‘Broken’ Models
But with China slowing and countries such as Brazil and Russia in recession, emerging markets are suffering from a "broken growth model," David Lubin, head of emerging markets economics at Citigroup Global Markets, said at an IIF conference in Lima.
"Historically, emerging-markets crises were located in the balance of payments," Lubin said. "This is not. This is a growth crisis."
Willem Buiter, chief economist for Citigroup, is predicting a global recession will start in 2016, led by China.
The IMF left its forecast for China’s growth at 6.8% this year and 6.3% in 2016. Still, the fund warned the “cross-border repercussions” of slowing Chinese growth “appear greater than previously envisaged.”
"I’m getting to the point where I don’t see concerns about China going away -- maybe ever," said David Fernandez, head of fixed-income research for the Asia-Pacific at Barclays Bank PLC.
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.
Turning Optimistic
"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 Sunday the US economy may be strong enough to merit an interest-rate increase by year end, while cautioning that policy makers are monitoring slower domestic job growth and international developments. “We remain committed to communicating our intentions as clearly as possible -- but not more clearly than the facts warrant,” he said.
For some, the day of Fed liftoff can’t come soon enough.
"Our recommendation is just do it," said Angel Gurria, secretary-general of the Organization for Economic Cooperation and Development. "Take the mystery out of the thing."
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