Economic Risks to Downside says IMF ahead of G-20 – #ChinaMeltdown

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Looming US Fed rate rise, the economic slowdown in China, falling commodity prices and conflict are the most immediate catalysts for risk to the global economy, but the impact would be most acutely felt in emerging and developing markets. In fact, the developed economies may be set for modest gains.  “In advanced economies, economic activity is projected to pick up modestly in the 2nd half of the year and into 2016.  In emerging economies, growth this year is projected to slow again relative to 2014; some rebound is projected next year, as conditions in distressed economies, while remaining difficult, are projected to improve.”

A Tale of Two Cities?

“In emerging economies, the slowdown reflects a continuation of the adjustment after the investment and credit boom post-crisis, together with the fallout from declining commodity prices, geopolitical tensions, and conflict in a number of countries.” The contrast between the emerging and developed markets increasingly is one of the have’s and have not’s, almost a Charles Dickens like contrast: “In an environment of rising financial market volatility, dollar bond spreads and long-term local currency bond yields have increased relative to the spring, stock prices have weakened, and capital inflows have declined. Emerging market currencies have generally depreciated, reflecting weakening commodity prices, concerns about the growth transition in China, an increase in risk aversion, and expectations of a lift-off in policy rates in the United States. In contrast, financial conditions in advanced economies continue to be easy. On the back of weak demand, safe real interest rates remain low, despite some widening of spreads, even as the policy rate lift-off approaches in the United States.”
Nonetheless, the Risks Connect Globe & Dragging all Down, Economically or into Conflict?
While the US and most developed economies appear to be in a different reality, everything from currency contagion to escalating conflicts to climate change/natural disasters to tides of migrants makes the risks ultimately shared. Failure of economic policies could easily be translated into nationalist remedies to deflect criticism of authoritarian governments and accountability, particularly as “China’s Miracle Economy Goes from Illusion to Nightmare?”  According to the IMF which will issue formally this report at the G-20 meetings of top Central Bank Governors and Finance Ministers now gathering in Ankara, Turkey (September 4-6, 2015), the solutions and/or precautions have to be also mutually defined:
Strong mutual policy action is needed to raise growth and mitigate risks:
  • Advanced economies should maintain supportive policies. In most advanced economies substantial output gaps and below-target inflation suggest that the monetary stance must stay accommodative. Fiscal policy should remain growth-friendly and be anchored in credible medium-term plans. Managing high public debt in a low-growth and low-inflation environment remains a key challenge.
  • In many emerging economies, policy space to support growth remains limited. The commodity price declines over the past year have alleviated inflation pressures and mitigated external vulnerabilities in net commodity importers, but increased external and fiscal vulnerabilities in commodity exporters. Oil exporters that have accumulated savings and have fiscal space can let fiscal deficits increase and allow a more gradual adjustment of public spending. For floaters with less policy space, exchange rate flexibility will be a critical buffer to the shock. This may require improving macroeconomic policy frameworks in some countries and keeping balance sheet exposures manageable.
  • Decisive structural reforms are needed to raise potential output and productivity across the G-2 members. Labor market reforms in advanced economies undergoing population aging should aim at raising labor participation, and actions to increase labor demand and remove impediments to employment are also needed in euro area economies and some emerging markets. Reforms to improve the functioning of product markets are also needed in Japan and the euro area, and reforms to improve productivity and raise potential output are key in many emerging economies. Joint policy efforts by deficit and surplus economies are needed to reduce excess imbalances while sustaining growth.  (Read More of IMF Report:  “IMF Note on Global Prospects & Policy Challenges
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