WASHINGTON – The world’s biggest economies urgently need new ways to support demand and contain risks as the outlook for global growth deteriorates, International Monetary Fund staff members say.
Group of 20 policymakers “must act now to implement forcefully” existing growth strategies while also planning for unified support for demand through fiscal spending, IMF staff said in a report ahead of meeting of finance ministers and central bankers in Shanghai on Friday and Saturday. The IMF is likely to further cut its global-expansion outlook in the next update in April, according to the report.
While officials including U.S. Treasury Secretary Jacob J. Lew have indicated there will not be a massive global effort to stem financial-market turbulence at the G-20, the report builds on calls for greater coordination to support a world economy coping with China’s slowdown and falling commodity prices. Staff at the Washington-based lender also called for consideration of an international initiative to support nations at the center of the refugee crisis, saying noneconomic shocks “could have significant spillover impacts.”
“Strong policy responses both at national and multilateral levels are needed to contain risks and propel the global economy to a more prosperous path,” said the report, which is typically released before G-20 meetings and was prepared by staff members led by Helge Berger, a division chief in the IMF Research Department. “There is scope to go beyond the agreed strategies and introduce significant new measures designed along the principles of successful reforms to further boost output.”
The IMF report stopped short of advocating broad measures to address foreign-exchange volatility. Some analysts and investors have called for a modern-day Plaza Accord, the 1985 deal among major economies to weaken the dollar and stabilize currency markets. Emerging nations should use exchange-rate flexibility, where feasible, “to cushion the impact of adverse external shocks,” the IMF said.
The main risks to the global economy include persistent market turbulence in advanced economies, tighter financial conditions in emerging markets, a sharper-than-expected slowdown in China and further drops in oil prices, the IMF said.
Regarding specific regions, the IMF said additional U.S. Federal Reserve interest-rate increases should be “based on clear evidence of wage or price pressures.” The European Central Bank should keep signaling it will use all instruments available, while Japan should support its negative rates with “fiscal, structural, and ambitious incomes policies,” the fund said.
Chinese officials, who surprised investors with a yuan devaluation in August, “should ensure clear communication of their exchange rate policies and be willing to accept the moderately lower growth consistent with rebalancing” the economy, the IMF said. If growth weakens too much, the nation should consider “on-budget fiscal stimulus,” the IMF said.
Lew said in a Bloomberg Television interview this week not to “expect a crisis response in a noncrisis environment.” Even so, Lew said the U.S. wants a more serious commitment from other G-20 countries to use monetary policy, fiscal measures and structural reforms to stoke demand.