Challenges Facing Global Recovery

The global recovery is strengthening. That provides an environment of opportunity to address key policy issues that can help support stronger and more sustainable growth—and foster the financial stability essential to the health of the global economy, imf.org reported.

The IMF has just released its latest World Economic Outlook, which is updated on a quarterly basis. It forecasts 3.6% global growth this year and 3.7% next year. That is well above the 3.2% in 2016, IMF First Deputy Managing Director David Lipton said in Munich, Germany, Monday.

Lipton highlight some looming issues that require more attention.

Excerpts follows:

Consumption and Investment

The sources of strength include both consumption and investment. The strengthening of investment is important, because many companies have been reticent about making physical investments since the Global Financial Crisis. Investment, which is very import intensive, is contributing to an acceleration of trade, which is a way of spreading the beneficial effects of recovery across the global economy. For the first time in several years, trade is growing faster than gross domestic product.

Another important development: the recovery has become more broad-based. The advanced economies are finally all growing, led by the euroland and Japan. "We also have stronger growth across many emerging market countries, especially China, emerging Europe and Russia.

"We see Germany growing at 2% this year, and moderating to 1.8% in 2018. The US is also growing at a little over 2%, but IMF has reduced that forecast a bit. We also have downgraded the UK forecast."

The countries contributing to the recovery add up to about 75% of the world, measured by GDP. The 25% of the world that is not growing represents a broad swath, in fact a large number of the developing countries. This includes some emerging market countries and the commodity exporters, especially oil-rich countries. In fact, some 46 countries are experiencing falling GDP growth in per capita terms.

It is also important to point out that, in terms of the benefits of the recovery, there are also disparities within many of the countries that are growing. For example, across the advanced economies, real wage growth has remained low and many people have lost ground since 2008.

Some of that stems from the lingering impact of the global crisis. Some can be blamed on technological change and trade.

Continuing Challenges

"One of the overriding challenges we face is the normalization of monetary policy from the unconventional monetary policies undertaken by several major central banks after the global crisis. But we cannot ignore the risk this process poses for a financial system accustomed to historically low interest rates.

IMF's Global Financial Stability Report analyzes market trends and risks. Most importantly, the report points to a global financial system that has become more resilient. The major banks and insurers have increased their capital and liquidity buffers, and addressed many issues from the global crisis. Emerging markets have benefited from low-cost capital flows over the past year and can borrow to spur growth.

The report highlights growing vulnerabilities, for example those stemming from low rates, which make countries and investors more susceptible to unexpected shocks. A sudden shift in market sentiment or a geopolitical event could carry considerable weight.

The pursuit of higher yield has left many investors exposed to potential credit, maturity and liquidity risks. Volatility is extremely low across asset classes and countries, fueling investor complacency.

Rising Debt

In addition, debt is increasing across the globe. In the G20 countries, private sector leverage is higher than before the financial crisis. "And we are witnessing a rapid increase in the indebtedness of low-income countries, where non-traditional sovereign lenders like China, Russia and Saudi Arabia have been very active."

It is the responsibility of central bankers and other policymakers to address financial and debt vulnerabilities before they become more acute and more expensive to act upon.

Emerging markets have been the high-flyers of the global economy for decades, seeking rapid growth to catch up with the advanced economies. That should be possible by investing, acquiring technology, better educating workers, and thus boosting productivity. The end result of that trend would be a convergence of living standards.

Digital Finance

The digital finance is playing out right now before our eyes in the online payments platforms like PayPal and China’s Ali-Pay. In only a few years, many people in China’s cities have stopped using cash altogether. In East Africa, the online banking pioneered by M-Pesa has benefited millions of people who previously lived outside the financial system.

"These success stories show how Fintech can be a force for inclusion and development. But Fintech also presents a serious challenge to traditional banking models. And as online platforms develop lending and investment products, effectively acting like banks, every regulator and supervisor must be concerned with whether the current regulatory framework is adequately encompassing these businesses.

Each one of the above will influence the fortunes of the global economy. "It is our responsibility to face up to the opportunities and challenges with the tools at our disposal, or to invent the new toolkits that can make a difference," Lipton concluded.