Millennium Post

An uncertain global mart

An uncertain global mart
The notion that advanced economies are on a steady course of recovery and growth. They has taken a sudden knock with incipient risks, especially for the already struggling emerging economies like India. EMEs’ role as principal growth driver had recently diminished somewhat in juxtaposition to the
relatively more robust recovery and growth in USA and in a few other advanced economies other than the euro-zone.

In striking contrast, latest IMF and World Bank assessments have now sharply lowered US GDP estimates for 2014 from 2.8 per cent to two and 2.1 per cent respectively, due to its negative growth in first quarter, related mainly to harsh winter. But a rebound of late, IMF notes, is only a partial offset to the weak first quarter and so growth is now projected at two per cent possibly rising to three per cent in 2015. For the emerging markets, especially the downward revision of US growth in 2014 would mean lower external demand for their exports, a reviving sector in India. But, more importantly, IMF has come out with a series of concerns on US growth outlook over the medium to long term with its wide-ranging effects for the world economy. Already, emerging markets face a ‘tough climb’ back to past growth levels, as another study noted, with global economy becoming less supportive and productivity gains of the past fading away. Looking at the US prospects, IMF has also reduced potential growth average to two per cent, as compared to three per cent in pre-crisis decades.

The ‘scars of recession’ are still visible, said Christine Lagarde, Managing Director of IMF, at a press conference.  For sustained recovery and growth, ‘US should invest in its future, with priority to invest in people and in infrastructure, and encourage innovation and stimulate productivity’. Also, there is growing call from international institutions for major countries to reduce income inequalities which are rising, more markedly in USA and other developed nations.

In discussing the problems of US economy, IMF has entered into the political arena to urge bi-partisan agreements in the US Congress, where the Republicans have consistently thwarted the Obama Administration moves to address not only the budgetary and financial sector problems but also on equity issues like minimum wage. IMF has also urged tax reforms, investments in infrastructure and education, and a broad agreement on immigration in USA in the interests of expanding labour force, as population growth slows, and for getting skilled workers.

Given all the imponderables, IMF has highlighted a moderate course of US monetary policy by the Fed, which is of even more direct concern to emerging economies. Fed is now on a path of tapering purchases of treasury and other assets which would be completed before the end of this year and for a gradual withdrawal of monetary accommodation by revising interest rates which, markets expect, could take place by mid-2015. It is here that IMF cautions Fed against any hasty withdrawal of monetary accommodation, with all the in-built weaknesses in US economy it has enumerated.’Given the substantial economic slack in the economy, there is a strong case to provide continued policy support. Ideally, steps should be taken to approve and implement a credible medium-term fiscal consolidation plan so as to provide the flexibility for more near-term fiscal support to the economy’.
At the same time, IMF points out according to Fund staff’s baseline, the economy is expected to reach full employment - an objective of US Federal Reserve - only by end-2017 and inflationary pressures are expected to remain muted. If true, policy rates could afford to stay at zero for longer than the mid-2015 date currently foreseen by markets, IMF said.

Christine Lagarde said that earlier than timely tightening could possibly have consequences on the US economy, constraining the recovery momentum and would not be positive from an employment point of view. Secondly, it could have more severe consequences in terms of global economic outlook where the spillover to emerging markets would leave a mark on their respective growth. So it’s from that, sort of, two-fold perspective that we would be looking at it.

The monetary policy would also have to remain cognizant of financial stability risks, particularly those that are difficult to contain through available regulatory and supervisory tools, because of their spillover effects on the rest of the world economy. Even if inflation – given the Fed target of two per cent – were to rise more rapidly than expected but the economy was still well below full employment, tolerating a modest rise of inflation could be consistent with the Fed’s balanced approach, according to IMF.

Lagarde also suggested enhanced Fed’s communication toolkit would help temper the likelihood of market volatility along the exit path. This could include press conferences by the Fed Chair after each FOMC meeting (to provide a more frequent, structured environment to explain the committee’s evolving thinking) and a quarterly monetary policy report conveying the majority view of the FOMC on the outlook, policies, and the nature of uncertainties around the baseline.

The downside risks to US recovery comprise renewed weakness in the housing market, financial-market turbulence and a possible weakening of productivity growth. Like IMF, OECD also suggested a gradual pace of exit of Fed’s unconventional monetary policy, as the economy approaches full employment and inflation goes back to the Fed’s two per cent target. All this caution should be helpful to other central banks, particularly of emerging economies, more at risk than developed nations, in calibrating their own monetary policies in relation to both domestic and external factors. Indeed, the challenging growth and jobs agenda for USA also focuses on need to lessen poverty affecting some 50 million (about 15 per cent).President Obama, whose personal approval rating may have gone down, is persisting with his social agenda of raising the minimum wage of workers – recently he raised it for Federal workers from less than $8 dollars to $10.10 – reducing education costs and providing access to high quality healthcare which would help vulnerable families.
IMF has welcomed the Administration’s reforms including the more recent measures to cap carbon emissions from coal-fired power plants and said US should build on the benefits from its growing energy independence. Reform of the social security system to strengthen its finances is another major call on US government.
S Sethuraman

S Sethuraman

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