Last updated: April 19, 2013 10:58 pm

Five lessons from the IMF spring meetings

Currency-designed wind vane, pfeatures©Dreamstime

Which way up? Many ways of making money via currencies have been found wanting in recent years

The world’s leading economies acknowledged on Friday that “further actions are required” to put the global economy on track for strong, stable and balanced growth.

In the communiqué from the Group of 20 leading economies’ talks in Washington, Japan and South Korea were praised for recent moves to stimulate activity. But finance ministers and central bank governors gave warning that “much more is needed to fulfil our commitment to address the ongoing weakness in the global economy”.

By the numbers: The Global Economy

By the numbers: The Global Economy

The G20 again called on the eurozone to accelerate steps to create a banking union, while the US and Japan were urged to prioritise a medium-term fiscal consolidation. None of these policy priorities runs counter to the already stated objectives of these countries.

On currencies, the G20 maintained its compromise from February that countries should move towards market-determined exchange rates and nations would “refrain from competitive devaluation and will not target . . . exchange rates for competitive purposes”.

This statement on currencies can be seen as a lowest-common-denominator call on countries not to target their exchange rates – but nothing that would stop quantitative easing in the US and Japan or tackle China’s currency undervaluation.

“I think it was important, that from many sides it was underlined, that the G20 communiqué from Moscow said monetary policy should not aim at manipulating exchange rates and cause competitive devaluations,” said Jens Weidmann, Bundesbank president, after the session.

The statement pleased Japan. The country has come under fire from some emerging economies for its monetary stimulus, which they see as an aggressive act in a currency war.

“Japan explained that its monetary policy is aimed at achieving price stability and economic recovery, and therefore is in line with the G20 agreement in February,” Taro Aso, Japan’s finance minister, told reporters afterwards. “There was no objection to that at the meeting.”

The G20 discussions mark the end of a week of spring international economic meetings, which have highlighted big divergences in economic policy around the world and the minimal level of co-ordination between different countries.

Five things have been learnt about the world economy this week:

1. The global economic outlook is deteriorating

A definitive economic pessimism has infected Washington at a time when the official International Monetary Fund forecasts were reasonably positive. The fund’s World Economic Outlook talked of a three-speed global economy and “bumpy” roads ahead, but said the important context was that “global economic prospects have improved again”.

No sooner had the IMF published its latest forecasts, than they seemed out of date, being followed swiftly by poor US labour market figures and weak Chinese economic growth in the first quarter of the year. Olivier Blanchard, the fund’s chief economist, recognised that the weak Chinese figures implied another downgrade to the growth outlook, but added: “For the moment the forecast is 8 per cent.”

Some delegates to the meetings worried that this type of error arose because the IMF was not doing its job and taking a global view of economies. One problem is that disappointing figures relate to every country expecting others to grow strongly and basing their relatively optimistic outlook on that basis. When each country disappoints, it feeds through to others.

Professor Allan Meltzer, of Carnegie Mellon University, put it well, asking a question in a public conference with leading central bankers. “Why,” he asked, “has there been such a weak response to such an extraordinary stimulus?”

No good answer came back.

2. There are some new risks to financial stability

The theme of conversations surrounding financial stability in Washington was a synthesis of old and new risks. The old ones stem from the financial crisis or before, and still have not been solved, while the new risks relate to potentially dangerous side-effects from the crisis-fighting measures implemented.

The old risks include still-weak banks mostly in the eurozone sitting alongside a rump of heavily indebted companies that threaten a new vicious circle of failing firms, leading to even weaker banks alongside governments that have little firepower left to ensure banks are properly capitalised.

Alongside these well-understood – albeit very difficult to solve – problems sit a bunch of new risks caused by the extended period of extraordinarily loose monetary policies. Among the new threats the IMF worried about were a surge in US corporate loans with weak underwriting standards very early in the recovery, corporate borrowing in foreign currency in emerging markets, and a search for yield among pension funds and insurance companies that led them to take gambles that might well not pay off.

Although the IMF thought financial stability had improved since late last year, it is now concerned that the huge monetary easing, while beneficial, has nasty side-effects. “When the patient is still under treatment, you should not suspend the medicine, but you should always be vigilant about the side-effects of this medicine,” said José Viñals, IMF head of financial stability.

3. Quantitative easing looks quite different depending on where you are sitting

If you are Taro Aso, the finance minister of Japan, then it is a “monetary bazooka” that his central bank has just fired at deflation. “The revival of Japan will be beneficial to the rest of the world,” he wrote in the Financial Times this week.

But if you are Mauricio Cárdenas, the finance minister of Colombia, then QE looks alarmingly like a device to export deflation by sending flows of capital to emerging markets and driving up their exchange rates.

“Through measures like the ones the Bank of Japan just introduced . . . we can end up in a situation [in the economy] that doesn’t move forward but moves backwards,” Mr Cárdenas told a meeting in Washington on Thursday.

The tension over QE in advanced countries turned into one of the main themes of this week’s spring meetings.

For its part, the IMF endorsed easy monetary policy in advanced countries, but fretted about the exit from QE. “The greatest worry is that just like ‘what goes up comes down’, ‘what comes in goes out’ – a sudden reversal of large and volatile capital flows that can bring down the economy [of developing countries] with it,” said Christine Lagarde, the fund’s managing director.

4. Academic research is not always what it seems

It was the Excel spreadsheet error emailed around the world. Carmen Reinhart and Kenneth Rogoff, two economists at Harvard University, were left red-faced after a 28-year-old graduate student tried and failed to replicate one of their most famous papers.

Instead of growth falling to a mean of minus 0.1 per cent when a country has public debt greater than 90 per cent of gross domestic product, the replicators at the University of Massachusetts, Amherst, said that, using the same data, they got a figure of 2.2 per cent.

The error turned out to be fairly minor, Mr Rogoff and Ms Reinhart have always been careful about saying that high debt causes slow growth, and they have since done a much more thorough version of the same work.

But the incident highlighted the fragility of economic analysis linking high debt and austerity to growth, even as the world’s finance ministers argued over the pace of fiscal tightening at the IMF.

The US is asking Germany to create more demand at home to help the eurozone grow. Germany is unimpressed – suggesting that research is more often used to justify economic policy than to make it – but may be willing to allow slower austerity elsewhere in Europe.

5. The G20 is just as ill-equipped as ever to sort it all out

The G20 is the premier global forum of world economic management. Countries fight to be admitted to the club, but do little with membership. Since 2010, it has turned from being a cohesive group of the world’s most important economies, ensuring they took collective decisions to solve some difficult problems, into a body that spends hours negotiating the punctuation in a communiqué that adds little.

The G20 is mired in spats between emerging economies, fearful the rich world is attempting to devalue their currencies by subterfuge, amid advanced world incomprehension that poor countries would object to them trying to raise the rate of economic recovery.

The outcome is rarely edifying. By all accounts, this week’s G20 meeting, which was wrapping up late on Friday, will make little progress. Countries still value the G20 greatly as a forum for dialogue, but complain that too many nations sit round the table and make unnecessary interventions, with little genuine discussion.

It has turned into a talking shop without much bureaucracy or idea of its role. Outside a crisis, when nations want to solve problems and are willing to make sacrifices, the G20’s relevance to people and companies is diminishing rapidly.

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