Global imbalances

No rising tide to lift world economy

The World Economic Outlook (WEO) for April 2015, published by the International Monetary Fund (IMF) as a traditional prelude to the spring meetings of the IMF and the World Bank, is typically an authoritative source for those interested in global economic prospects. For some time now, the WEO has been suggesting that the overall economic outlook has been improving. Given the dynamics of oil as well as other commodity prices in recent months, a somewhat more buoyant outlook may have been expected. However, the overall tone of this year's report is sobering, with an emphasis on downside risks to the baseline scenarios. Among developed economies, on the positive side of the story, the United States is expected to consolidate its recovery, providing increasing momentum to the rest of the world. Other economies, like the United Kingdom and Australia, are also expected to sustain their climb up the growth ladder. However, as is widely known, Europe remains caught between crisis and stagnation, with very little visibility of any drivers of recovery, the European Central Bank's stimulus notwithstanding. Likewise, Japan, despite the three bazookas fired by the Shinzo Abe government, does not seem to be responding very well to the stimulus.

Among emerging economies, India is certainly among the bright spots. The latest forecast has India accelerating past China's growth rate in 2016 and holding the lead in the following year. While that attracted much attention in the Indian media, it must also be pointed out that China's steady slowing down over the next few years could be an adverse development for the global economy. Its linkages with Asian economies in particular carry significant spillover risks for the region. India, at its current size, cannot fill the void. In fact, the IMF views a permanent slowdown in China as a significant downside risk to its global forecasts; more so, if China were to experience a hard landing.

While energy and commodity importers are enjoying the macroeconomic benefits of lower prices, the same is obviously not true of exporters. Large emerging-economy exporters like Brazil, Russia and South Africa are clearly feeling the heat, with low prices putting pressure on both their balance of payments and their fiscal conditions. Oil exporters in West Asia have made large welfare commitments based on high oil prices, which they will find difficult to meet after the decline. Geopolitical risks are high on the IMF's watch list. But the wider implication of the commodity price dynamics is likely to exacerbate the unevenness of the global recovery. The report also points to exchange rate dynamics as a potential risk. There are financial risks to countries whose external debt is denominated in dollars. There will also be a reconfiguration of export competitiveness among countries, based on the linkages between their currencies and the dollar. The US monetary policy trajectory could exacerbate such vulnerability as global portfolios rebalance in favour of US assets.

Against this relatively risky backdrop, the general advice of the IMF is for countries to use whatever space they have to push ahead with their own structural reform agenda, with a view to strengthening domestic growth drivers. The message is that no one can rely on the rising tide; each one's efforts will determine whether it sinks or swims.