The IMF’s most recent forecast shows that the world economy is slowly strengthening. But we still are not seeing growth anywhere near the levels before the 2008 crisis. While financial markets have recovered, the real economy continues to lag in many countries—and that means there is not enough growth to generate jobs for the millions who have lost their jobs over the past five years. Our most recent forecasts see global growth of 3.3 percent this year, and 4 percent in 2014.
We are seeing a three-speed global recovery, but we need a full-speed recovery, which means strong, sustained, and balanced growth. Emerging markets and developing countries generally have been doing well, and some advanced economies are showing signs of recovery while others still have long ways to go.
We don’t see Europe returning to growth before 2014, and then at a modest 1 percent rate. For now, the countries of southern Europe remain mired in deep recession, and growth is weak among the core economies. The banking system is unable to provide much-needed credit in many countries, and business investment is falling. Unemployment continues to rise to unacceptable levels.
Europe’s problems require both national and collective actions. Fiscal policy is crucial. Countries that can afford to support their economies need to do so—and in ways that encourage the private sector to invest and boost demand. Others will need a sustained commitment to adjustment to ensure sustainable public finances. On monetary policy, the European Central Bank has protected monetary union with the LTRO bank funding scheme and the conditional OMT monetary transmission preservation scheme. But more needs to be done to get credit channels functioning again. Additional unconventional monetary measures may be required.
European Banking Union
There also needs to be action on the banking union, including bank recapitalisation through the European Stability Mechanism; a comprehensive banking union that adds a single resolution authority to the recently established supervisory authority; and a deposit insurance fund.
All of these actions are essential if Europe is to avoid slipping into stagnation. That would have implications for the global economy—not least for countries like South Africa, for whom the European market is so important. I will return to this point.
For the US, the recent rebound—nearly 2 percent this year and strengthening to 3 percent 2014—comes despite the impact of sharp fiscal consolidation this year. One key to the recovery has been the unconventional monetary policy that the Federal Reserve put in place after the 2008 crisis and subsequently has reinforced. These policies have been mirrored most recently in Japan, where the Bank of Japan has moved aggressively to loosen monetary policy to overcome deflation.
To this point, unconventional monetary policy has been good for the global economy. But there are concerns about the impact going forward, particularly in the emerging markets. There has been a lot of discussion about the impact of the flow of money from the advanced economies on asset prices and exchange rate valuations. So far, we don’t see exchange rates being pushed out of alignment, and we don’t see signs of asset bubbles. But caution is justified, and it is also important to study exit strategies—even if the off ramp is some years away.
Staying with the emerging market and low-income economies, there are estimates that they have provided roughly three-quarters of world growth since the 2008 crisis. The strength of the emerging Asian economies has been vitally important, particularly here in Africa. Asia’s demand for commodities and the flow of investment dollars and low-cost manufactured goods from that region has provided a crucial dynamic that is driving global demand. However, for countries like Brazil and South Africa, growth has been slower, suggesting that our three-speed construct may be too broad-brushed. Now we are starting to hear worries that Asia could be slowing—India’s growth is around 6 percent a year, down from 8 percent a few years ago, and China is not likely to see sustained double-digit growth again.
The challenges for a rising Africa
In a decidedly mixed global picture, sub-Saharan Africa stands out as a success story. In the nearly five years since the 2008 crisis, this region has grown faster than in the years before the crisis. Regional output grew 5.1 percent last year, and should accelerate to 5.4 percent this year and 5.7 percent in 2014. But growth has been stronger in the oil-exporting and low-income countries. Middle-income countries like South Africa and its neighbours have grown more slowly—in some cases because of weaker European demand and in others because of domestic problems. I’ll address the domestic issues when I address South Africa in greater depth.
As many know, African growth has been supported by strong investment and favourable commodity prices. But I’d like to point to a very important home-grown factor: the prudent macroeconomic management that many countries now practice. This is one of Africa’s most impressive achievements, because it demonstrates improved institutional capacity and a new standard of governance. Over time, more competent institutions and better governance can translate into better results in the fight against poverty—although the gains so far have been uneven.
Where are the risks to Africa’s outlook? Of course, a renewed global downturn would be a primary worry—especially if it involves a sharp drop in demand from emerging markets, with all that implies for commodities prices. More immediately, while inflation is falling in most countries, there are a few where rising prices remain a challenge. In a few other countries, reversing or containing fiscal expansion is also important.
Certainly, every country should be on guard against the shocks of another global slowdown; that is the essence of prudent management. For this reason, the IMF has urged several African countries to rebuild their fiscal buffers. These countries came through the 2009 recession relatively unscathed in part by using their fiscal reserves. Now is the time to save for the next rainy day. The challenge is to avoid reducing productive public investment and effective pro-poor spending. Some alternatives include widening tax bases, reforming badly run programmes, and replacing costly energy subsidies with targeted measures aimed at protecting the poor. This issue of reforming energy subsidies is included in the IMF’s African Regional Economic Outlook.
DAVID LIPTON
Lipton is IMF first deputy managing director.
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