The Global Economy in 2016

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The Global Economy in 2016

Chief Economist Interview IMF Survey January 4, 2016 T he global economy in 2015 saw some economies strengthen, while others—particularly emerging and developing economies—were squeezed by plummeting commodity prices and by tightened financial conditions. The IMF marked some big changes in 2015 as well: the U.S. Congress passed the 2010 quota reform and China’s currency, the yuan, was added to the IMF’s basket of official currencies. On the personnel front, the IMF welcomed a new chief economist, Maury Obstfeld, former chair of the economics department at University of California at Berkeley. He arrived in September from the U.S. President’s Council of Economic Advisors to succeed Olivier Blanchard as the IMF’s Economic Counsellor and Director of Research. Shortly before the start of the new year, IMF Survey sat down with Obstfeld to discuss the past year and to look ahead to 2016. IMF Survey: What is your assessment of how the global economy turned out in 2015? What went better than you anticipated, and what does not look so good? Obstfeld: There was good news and bad news. The U.S. economy continued its solid growth and job creation, while Europe generally picked up speed and Japan remained a question mark. But with some exceptions (such as India), emerging and developing countries continued to slow in the face of falling commodity prices and tighter financial conditions, and synchronized and sustainable global growth remained elusive. In some countries, beyond these very general trends, there is an overlay of political or geopolitical tension that magnifies the purely economic challenges. How these tensions play out in 2016 will be a major determinant of regional and global macroeconomic outcomes. It comforts me to reflect, however, that the end of 2015 produced one piece of very good news on the international monetary system: the U.S. Congress finally approved the IMF quota reform originally agreed in 2010. Along several dimensions, that change will strengthen the IMF’s capacity to meet future stability challenges, whatever they may be. IMF Survey: What are the other key issues we need to pay attention to in 2016? Obstfeld: China will remain high on the list. Its economy is slowing as it transitions from investment and manufacturing to consumption and services. But the global spillovers from China’s reduced rate of growth, through its diminished imports and lower demand for commodities, have been much larger than we would have anticipated. Serious challenges to restructuring remain in terms of state-owned enterprise balance sheet weaknesses, the financial markets, and the general flexibility and rationality of resource allocation. Growth below the authorities’ official targets could again spook global financial markets—but then again, time-honored methods of enforcing growth targets could simply extend economic imbalances, spelling possible trouble down the road. Obstfeld: “A predominantly advanced-economy lens for viewing the world economy has become ever more outmoded.” What else to watch? The crisis of refugees fleeing Iraq and Syria offers a major challenge to the absorptive capacity of EU economies and labor markets, but even more so to political systems. The project for common policing of the EU perimeter and the related tensions concerning free mobility of people within Europe bear watching. But we should not forget that countries such as Lebanon, Jordan, and Turkey are on the advanced front line of the refugee crisis. And even apart from refugee issues, Europe faces other political and economic challenges—from the Iberian Peninsula, to Greece, to Ukraine. Climate change and the struggle to limit CO2 emissions is a slow-moving crisis but one that we ignore at our peril. The COP21 agreement in Paris was a triumph for international cooperation. In 2016 we will see how national capitals react and get an initial take on whether the agreement promotes effective international cooperation. Finally, there is international trade—which has had setbacks in recent years as global trade growth has slowed relative to GDP growth. Will the Trans-Pacific Partnership (TPP) pass the U.S. Congress? We may know this spring. If so, will it be a prelude to a deal between the United States and the EU? The Doha round was effectively scrapped in Nairobi last month. If comprehensive multilateral trade agreements are off the table, can trade liberalization still proceed usefully on a more limited scale? The answers are important across the Fund’s membership. IMF Survey: Will 2016 be the year of Emerging Markets? Are capital outflows from emerging market countries a growing worry? Obstfeld: The year will offer an abundance of challenges, but yes, emerging markets will be at center stage. Capital inflows are down, some reserves have been spent, sovereign spreads have widened, currencies have weakened, and growth is slowing sharply in so…
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On January 4, 2016

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