Another warning from IMF Chief

Christine Lagarde[1] cautions   “low-low, high-high” scenario: the risk of low growth-low inflation, and high debt-high unemployment persists for a number of advanced economies.

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Forecasts for most emerging and developing economies are slightly worse than last year, with lower commodity prices one of the main drivers. While they still represent more than two-thirds of global growth this year, there is tremendous diversity within this group. For example:

• India is a growth bright spot;
• China is slowing but growing more sustainably;
• Sub-Saharan Africa continues to perform strongly;
• Russia, on the other hand, is experiencing economic difficulties;
• Brazil is also stagnating;
• And many parts of the Middle East are beset by political and economic turmoil.

So we should not think of emerging economies as just one single group. Each country faces very specific circumstances, some of them easier, some of them more difficult.

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Clearly, all policy space and levers must be utilized. It begins with demand support.

Continued monetary accommodation is needed, especially in the Euro Area and Japan.

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Fiscal policy also needs to be calibrated to the strength of the recovery, without losing sight of debt sustainability over the medium term.

• Effective insolvency frameworks are crucial to tackle the private debt overhang and deal with the total stock of €900 billion in non-performing loans that is blocking credit channels.
• In Japan, the authorities need to sustain the momentum of the second and third “arrows”—fiscal consolidation and structural reforms—if the first arrow of monetary easing is to have the intended effect of lifting inflation and growth.
• By leveraging lower oil prices to reduce energy subsidies, emerging and developing oil-importers could save, on average, a full one percent of GDP in 2015—resources that could be reallocated to growth-enhancing investments such as infrastructure, education, or health.

These are some of the macroeconomic dimensions. What about the financial stability dimensions?

The bottom line is that risks to global financial stability are rising. The “new mediocre” growth environment is not a comfortable place with respect to financial stability.

Financial risks may have declined in some areas, but they have also been migrating to others—for example, from banks to non-banks, and from advanced economies toward emerging markets.

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Note: Without any risk or responsibility

[1] Managing Director, International Monetary Fund at Atlantic Council, April 9, 2015