It’s grey and foggy in Lima – the ideal setting for the world economy’s great and good as they convene in Peru’s capital this weekend for the annual meetings of the IMF and World Bank.
Visibility is impaired because of the weather, leading to monstrous traffic jams, but the assembled finance ministers and central bank governors are arguably even more in the dark when it comes to prospects for the global economy.
The IMF, led by newly appointed Chief Economist Maurice Obstfield, declared in the latest World Economic Outlook that “complex forces” are undermining global growth prospects and that the “Holy Grail” of robust and synchronised global expansion “remains elusive”.
Translation: the IMF is lowering its global growth forecasts to 3.1 per cent in 2015 and 3.6 per cent in 2016, but these numbers mask a disjointed picture between advanced and emerging economies.
Official and private sector delegates here in Lima are fearing the worst
While there will be a slight pick-up in growth of advanced economies this year and next, emerging markets will slow sharply this year with only a modest acceleration in 2016.
While this might seem a small blip in the fortunes of the global economy, official and private sector delegates here in Lima are fearing the worst. The epicentre of risk is perceived to be China and emerging markets.
In a nutshell, these are the fears:
Tail risk in China
This risk stems from a continued slowdown in the economy (with the immediate fallout being the sharp fall in global commodity prices) and pressures on the banking system. A particular worry is heightened nervousness about the dramatic surge in local government debt. The Chinese authorities have stepped up efforts to reassure officials and markets that the risks are manageable.
Debt in emerging markets
This has risen from 50 per cent of GDP in 2005 to an estimated 75 per cent this year. Around 20 per cent of the debt is in foreign currency. With emerging market currencies under pressure and huge capital outflows continuing apace, the worry is that some corporates in these markets will be ‘swimming naked’, with un-hedged exposure to foreign-currency loans.
The impending normalisation of US monetary policy
This is expected to have global repercussions, in particular for emerging markets.
The negativity at the Lima meetings is infectious and unlikely to ease anyone’s nagging concerns about the global economy
There are some bright spots. Indian central bank governor Raghuram Rajan has been talking up his country’s relatively buoyant prospects, if somewhat cautiously. The continued see-saw in oil prices is providing significant fiscal headroom for oil-importing countries, such as India, bolstering their defences in case a worst case scenario materialises for the global economy.
However, the negativity at the Lima meetings is infectious and unlikely to ease anyone’s nagging concerns about the global economy.
Need to reinvigorate growth
What to do? Managing Director Christine Lagarde has repeated the IMF’s advice for countries to invest to support demand, safeguard financial stability, and implement structural reforms, while acknowledging that this is not necessarily being heeded. Countries need to upgrade their policies to reinvigorate growth, Lagarde said yesterday.
There will always be incurable optimists, of course. Like one whom I met yesterday who felt that the economic pessimism is overdone, suggesting that the biggest danger in Lima this week is tripping over one of the TV cameras pointed at yet another delegate sharing their gloomy prognosis of tail risks and meltdowns.