2016 will offer an abundance of challenges
IMF International Monetary Fund’s Economic Counsellor and Director of Research, Maury Obstfeld gives some indications on how he sees the economic and political challenges and prospects of 2016. TextileFuture provides here an excerpt of his forecast and major findings
The key issues of 2016 needing attention
Obstfeld: China will remain high on the list. Its economy is slowing as it transitions from investment and manufacturing to consumption and services. However, the global spill-overs from China’s reduced rate of growth, through its diminished imports and lower demand for commodities, have been much larger than we would have anticipated. Serious challenges to restructuring remain in terms of state-owned enterprise balance sheet weaknesses, the financial markets, and the general flexibility and rationality of resource allocation. Growth below the authorities’ official targets could again spook global financial markets—but then again, time-honoured methods of enforcing growth targets could simply extend economic imbalances, spelling possible trouble down the road.
A predominantly advanced-economy lens for viewing the world economy has become ever more outmoded.
The crisis of refugees fleeing Iraq and Syria offers a major challenge to the absorptive capacity of EU economies and labour markets, but even more so to political systems. The project for common policing of the EU perimeter and the related tensions concerning free mobility of people within Europe bear watching. However, we should not forget that countries such as Lebanon, Jordan, and Turkey are on the advanced front line of the refugee crisis. Even apart from refugee issues, Europe faces other political and economic challenges—from the Iberian Peninsula, to Greece, to Ukraine.
Climate change and the struggle to limit CO2 emissions is a slow-moving crisis but one that we ignore at our peril. The COP21 agreement in Paris was a triumph for international cooperation. In 2016 we will see how national capitals react and get an initial take on whether the agreement promotes effective international cooperation.
Finally, there is international trade—which has had setbacks in recent years as global trade growth has slowed relative to GDP growth. Will the Trans-Pacific Partnership (TPP) pass the U.S. Congress? We may know this spring. If so, will it be a prelude to a deal between the United States and the EU? The Doha round was effectively scrapped in Nairobi last month. If comprehensive multilateral trade agreements are off the table, can trade liberalization still proceed usefully on a more limited scale? The answers are important across the Fund’s membership.
The year 2016 will offer an abundance of challenges, but yes, emerging markets will be at centre stage. Capital inflows are down, some reserves have been spent, sovereign spreads have widened, currencies have weakened, and growth is slowing sharply in some countries. Currency depreciation has proved so far to be an extremely useful buffer for a range of economic shocks. Sharp further falls in commodity prices, including energy, however, would lead to even more problems for exporters, including sharper currency depreciations that potentially trigger still-hidden balance sheet vulnerabilities or spark inflation.
The mood in financial markets is glum as 2015 ends, and susceptible to increased volatility, notwithstanding continuing accommodation by the European Central Bank and the Bank of Japan. Of course, the U.S. Federal Reserve launched in December what it intends to be a cycle of gradual interest-rate hikes. It will be critical how the Fed manages subsequent interest-rate increases during 2016, and how it communicates with the market—a task it seems to have commenced on the right foot at the end of 2015. There is no doubt that global financial conditions are tightening, and emerging and developing markets are especially sensitive to the effects, given other current woes.
Emerging and developing economies should be an even more intense focus of research. During the 1980s, emerging and developing economies accounted for around 36 % of global GDP (measured in purchasing power parity, or PPP, terms) and some 43 % of global GDP growth (with PPP weights). For 2010-2015, the numbers were 56 % and 79 %, respectively. So a predominantly advanced-economy lens for viewing the world economy has become ever more outmoded. That research agenda for emerging and developing economies comprises classic issues related to the balance of payments—capital flows and their management, foreign exchange intervention, vulnerabilities in external balance sheets, and the determinants of current account balances, trade patterns, and trade volumes.
There are many additional questions. What policies and policy frameworks are most conducive to higher potential output and its growth? Potential GDP growth seems to have declined throughout the world, as noted in past editions of the World Economic Outlook (WEO), but the reasons are not well understood. The April 2016 WEO will look at advanced-economy structural reforms in that context.
Trends in inequality also warrant attention. Despite considerable global convergence in national per capita incomes, a more equitable income distribution within countries has not necessarily followed. This inequality has implications for overall economic productivity (for example, through health outcomes) and for the political sustainability of market-friendly policies. How can growth be made more inclusive, and how might that, in turn, support higher growth?
Beyond these longer-term questions of growth and distribution, there are many economic stability issues calling for attention. For example, looking broadly across all economies, integration of the financial sector into our macro-policy frameworks remains an urgent research priority.