Bridges Weekly Trade News DigestVolume 16Number 35 • 17th October 2012

Fears of Global Economic Slowdown Dominate IMF Annual Meeting


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The protracted global financial crisis dominated the agenda at last week’s International Monetary Fund (IMF)  Annual Meeting in Tokyo, Japan, as new data showed that economic growth is likely to be even lower than anticipated this year and next. As officials debated how best to boost growth while addressing macroeconomic imbalances, the controversial topic of rich countries using further quantitative easing to boost their job markets - a practice slammed by many emerging economies as putting their own exchange rates and trade at risk - featured prominently during the high-level discussions.

Ahead of the Tokyo meetings, the IMF released more pessimistic economic and trade growth forecasts for 2012 and 2013 than it had projected in July. Economic growth is now slated to reach 3.3 percent this year, down from the earlier estimate of 3.5. Next year, output is expected to expand by 3.6 percent, down from the previous prediction of 3.9 percent.

“The crisis in the euro area remains the most obvious threat to the global outlook,” the IMF cautioned in releasing the estimates. “Despite recent improvements, global imbalances and the associated vulnerabilities are likely to remain well above desirable levels unless governments take additional, decisive action,” the Fund warned, adding that “no significant improvement appears in the offing.”

In light of these stark predictions, the IMF’s International Monetary and Financial Committee (IMFC) - which is made up of the organisation’s governors, specifically finance ministers and central bank governors of member countries - stressed that policies regarding jobs and growth, repairing financial systems, and reducing global imbalances “are key priorities.”

“We are committed to strengthening domestic sources of growth in surplus economies, boosting national savings while enhancing export competitiveness in deficit countries, and fostering greater exchange rate flexibility, where appropriate,” the IMFC said in its final communiqué. “We reaffirm our commitment to avoid any form of trade and investment protectionism.”

However, observers note, there is a growing concern among policymakers that the positive effects of additional monetary policy are becoming less apparent and that other, more difficult, fiscal consolidation and structural reforms are needed, particularly in the eurozone.

Exchange rate issue sparks debate

Recently, a new IMF pilot report indicated that various exchange rates are either under- or overvalued compared to what would be considered desirable policies and fundamentals, risking additional imbalances that could cause increased vulnerability.

While current accounts are believed to be too strong and real exchange rates undervalued in China, Germany, Indonesia, Malaysia, the Netherlands, Singapore, South Korea, Sweden, and Thailand, these imbalances “are fully offset,” the IMF said, given that current accounts are too weak and real effective exchange rates overvalued in Australia, Brazil, Canada, Japan, Turkey, Russia, South Africa, United States, the United Kingdom, and, within the Euro area, Spain, Italy, and France.

Against this background, various emerging market members of the IMFC argued that new rounds of quantitative easing, such as the ones enacted by the US Federal Reserve, Bank of Japan, and European Central Bank last month, would adversely affect their economies.

While some urged caution and pushed for a greater balance between using monetary and fiscal measures, others took a harsher tone, stressing their readiness to enact their own policies to defend their trade balances and exchange rates if necessary.

Brazilian Finance Minister Guido Mantega, whose warnings of a global “currency war” when the US introduced its second round of quantitative easing in 2010 made international headlines, cautioned on Saturday that rich countries’ “lax” monetary policies have also proven less than effective, and that they would instead prompt depreciations in developed economy exchange rates and result in export increases.

“Advanced countries cannot count on exporting their way out of the crisis at the expense of emerging market economies,” the Brazilian official said.  Adding that “currency wars” will only worsen the global economic crisis, he argued that “trying to grasp a larger share of global demand through artificial means has many side effects.”

“Brazil, for one, will take whatever measures it deems necessary to avoid the detrimental effects of these spillovers,” Mantega said, ostensibly speaking in defence of Brasilia’s recent decision to temporarily raise import tariffs on various goods. “We cannot accept the attempt to unfairly label as ‘protectionist’ legitimate measures of defence in the areas of foreign trade, exchange rate, and capital account management.”

Yi Gang, the Deputy Governor of the People’s Bank of China, similarly questioned whether these new rounds of quantitative easing would have their intended effects.

“While the announcements of further unconventional monetary policy measures by major advanced economies seemed to have lifted market sentiment somewhat, it remains to be seen whether these measures could support growth and employment as they intended to,” Yi said. The Chinese official added that earlier rounds of “unconventional operations” have shown diminishing returns, fuelling concerns about the “collateral consequences” of such policies.

Bernanke defends US policies

Speaking at an event hosted by the Bank of Japan and the IMF on the sidelines of the Fund’s meeting the following day, Federal Reserve Chairman Ben Bernanke defended the US’ decision to pursue its latest round of quantitative easing, including the measure’s “explicit conditioning on improvements in labour market conditions,” as a way to ease financial conditions and instil greater public confidence, while acknowledging that “monetary policy is not a panacea.”

Under the Federal Reserve policy announced in September - nicknamed QE3 - the US will buy an additional US$40 billion per month in mortgage-backed securities, along with the current US$45 billion a month it buys via other asset purchase programmes. The policy is set to continue until the US job market sees substantial improvements.

Responding to concerns raised by many emerging economies following the QE3 announcement, Bernanke questioned whether advanced economy monetary policy indeed has the negative “spillover effects” that US trading partners have raised.

“I am sympathetic to the challenges faced by many economies in a world of volatile international capital flows,” he said. “I would argue, though, that it is not at all clear that accommodative policies in advanced economies impose net costs on emerging market economies,” adding that recent research did not support the view that these rich country policies are the “dominant factor” behind emerging market capital flows. Bernanke also noted that measures that support the recovery in advanced economies are also likely to boost trade and growth in emerging markets.

The IMF meetings, which came to a close on Sunday, are held concurrently with the World Bank Group Annual Meetings. The next major meeting of the IMFC will be the Spring Meetings, which will be held in Washington next April. Officials will then review progress made in addressing the global financial crisis and discuss any additional policy measures that might be needed at that point.

ICTSD reporting.

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