With asset prices falling in many key markets, soaring energy and commodity prices stoking inflation, and global growth on a downturn, the world faces some difficult policy choices, IMF First Deputy Managing Director John Lipsky said in a wide-ranging speech, “Perspectives on the Global Economic Landscape and the Role of the Dollar.”
Speaking at the Brookings Institution in Washington, D.C., on July 22, Lipsky said that high oil prices were creating new imbalances in the global economy. Although the depreciation of the dollar was helping reduce the U.S. current account deficit, it had not been sufficient to alleviate imbalances and risks. “Rather, new misalignments may be emerging and risks may be shifting,” he stated.
Lipsky said policymakers around the world faced differing sets of challenges.
In advanced economies, where growth is projected to fall below potential in 2008 and 2009, supporting economic growth while stabilizing the financial system and managing inflation were key objectives. “The risk of second-round effects from the surge in commodities prices and continued stress in financial markets is complicating the response to the slowdown,” Lipsky said. “That said, inflationary pressures must be monitored closely, as allowing the past decades’ gains in lowering inflation and inflation expectations to be lost would seriously undermine future economic progress.”
In many key emerging market economies, combating rising inflation, resulting from both strong domestic demand growth and surging commodity prices, is the central challenge. Lipsky said that many central banks have raised policy interest rates in response to rising inflation, but interest rates generally remain negative in real terms, particularly in countries where exchange rate management has limited monetary policy flexibility. “There is a risk that many of these countries have fallen behind the curve in tightening policies,” he said.
Lipsky also noted that financial market conditions remain difficult: “Forceful policy responses to the financial turbulence and encouraging progress toward bank recapitalization have represented important contributions. Nonetheless, indicators suggest that credit deterioration is widening and deepening as economic conditions weaken.”
Achieving better balance in demand growth across countries is also needed to reduce global payments imbalances and boost confidence. Policy plans outlined in the IMF’s Multilateral Consultation on Global Imbalances remain broadly appropriate for doing this, Lipsky said.
Key components of these plans include a reduction in the current account deficit in the United States through a shift toward greater domestic saving and improved net export performance; in China, structural reforms, along with increased flexibility of the renminbi with respect to a basket of currencies in order to support a rebalancing of Chinese growth toward domestic consumption; an increase in infrastructure and social spending in Saudi Arabia to alleviate supply bottlenecks and reduce the current account surplus; further progress on growth-enhancing reforms in Europe; and continued structural reform, including fiscal consolidation, in Japan.