BL: IMF Says Risks to Global Economy Have Risen `Significantly'
By Shamim Adam - Jun 9, 2010
Risks to the global economic outlook have “risen significantly” and policy makers have limited room to provide support to growth, International Monetary Fund Deputy Managing Director Naoyuki Shinohara said.
Most advanced economies are experiencing a “subdued” recovery, Shinohara said in a speech in Singapore today. “A key concern is that the room for continued policy support has become much more limited and has, in some cases, been exhausted.”
Stocks have tumbled in the past two months on concern that the global recovery will be derailed by the European debt crisis. Policy makers are diverging on prescriptions for sustaining the global recovery, with U.S. Treasury Secretary Timothy F. Geithner calling on Japan and European countries with trade surpluses to boost domestic demand, while Europe’s representatives have said reining in budget deficits was the top priority.
As advanced economies suffer stunted recoveries, Asia will continue to lead the world economic rebound, according to Shinohara, the former top currency official at Japan’s Ministry of Finance. That brings its own challenges, with increasing capital inflows and the risk of overheating if policy makers fail to take “appropriate” action, he said.
Asia’s rebound is outpacing the rest of the world as companies from Nissan Motor Co. to Taiwan Semiconductor Manufacturing Co. increase exports and domestic spending strengthens. While the outlook for exports has become “challenging,” the region may avoid a major slowdown in growth should Western economies slump, according to HSBC Holdings Plc.
Stimulus Room
“The growth risk for Asia has certainly increased with fiscal consolidation on the agenda in Europe and the labor market not recovering as quickly as expected in the U.S.,” said Frederic Neumann, co-head of Asian economic research at HSBC in Hong Kong. “However, Asia has plenty of room to add extra stimulus, most notably in China.”
Some of the region’s central banks have started to withdraw monetary stimulus to stem inflation and asset bubbles while others are reluctant to increase borrowing costs on concern the European debt crisis may thwart the global economic recovery.
Macroeconomic policies have “appropriately” begun to normalize and the “strong” fiscal position in most Asian economies provides them with the “space” to respond flexibly, Shinohara said.
Shockwaves, Upheaval
“After nearly two years of global economic and financial upheaval, shockwaves are still being felt, as we have seen with recent developments in Europe and the resulting financial market volatility,” Shinohara said. “The global outlook remains unusually uncertain and downside risks have risen significantly.”
The escalation of Europe’s debt crisis forced the European Union and the International Monetary Fund to offer as much as 750 billion euros ($897 billion) to countries in danger of financial instability. Asian governments said last month public debt risks and “destabilizing” capital flows are among threats to the region’s recovery.
“Should the recovery continue as expected, Asia’s bright growth prospects, together with low interest rates in major economies, would likely attract more capital,” Shinohara said. “This could lead to risks of overheating in some economies if appropriate policy action is not taken. On the other hand, further increases in global risk aversion could see capital flows change direction quickly.”
Europe Effects
Group of 20 finance officials who gathered earlier this month signaled deeper concern about the economic and fiscal outlooks than when they last met in April. In a statement after their June 5 meeting, the finance chiefs promised to “safeguard” the recovery, yet replaced an endorsement of budget stimulus with a pledge to pursue “credible, growth- friendly measures to deliver fiscal sustainability.”
“Adverse developments in Europe could disrupt global trade, with implications for Asia given the still important role of external demand,” Shinohara said today. “In the event of spillovers from Europe, there is ample room in most Asian economies to pause the withdrawal of fiscal stimulus.”
Asian policy makers have a range of tools to manage capital flows, Shinohara said.
“Most countries in Asia also have room to address the impact of capital flows through more exchange-rate flexibility,” he said. “In some exceptional circumstances, controls on capital flows may be useful and can provide temporary breathing space during periods of large swings in capital flows.”
Yuan Flexibility
The Chinese yuan is still undervalued and more flexibility in the exchange rate would help the world’s fastest-growing major economy, Shinohara said.
“We have been saying that the flexibility of the yuan is to the benefit of China,” he told reporters in Singapore today. “The medium-term viewpoint is that the yuan is still significantly undervalued and there is room for adjustments.”
He also said he doesn’t believe European nations are “trying to depreciate” the euro, which has weakened amid the sovereign-debt turmoil. There isn’t much to worry about in Hungary right now and the situation in the country is much calmer, he added.
To contact the reporter on this story: Shamim Adam in Singapore sadam2@bloomberg.net
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