By Christine Lagarde
The global economy in 2013 remained suspended between the poles of hope and uncertainty. While recovery gained momentum, particularly in some advanced economies, the world economy is not yet flying on all engines – and is likely to remain underpowered next year as well.
The International Monetary Fund’s latest forecast puts global GDP growth at 3.6% in 2014, which is decent, but still below potential growth of around 4%. In other words, the world could still generate considerably more jobs without fueling inflationary pressure.
This means that the IMF’s members – whether advanced, emerging-market, or developing economies – have more work to do. A strong and lasting recovery that lifts all countries and all peoples requires policymakers to press ahead on all fronts – fiscal, structural, and financial.
At the same time, the international community must reinvigorate its efforts to strengthen cooperation through the G-20, the IMF, and other actors. Indeed, only through such collaboration can we overcome the lingering impact of the global crisis.
We have certainly avoided the worst-case scenario (Great Depression II) over the past five years, thanks to the efforts of global policymakers – particularly the determination of central banks to keep global interest rates low and to support the financial system, coupled with fiscal stimulus in some countries.
But the time has come to push further, including by using the room created by unconventional monetary policies to implement structural reforms that can jump-start growth and create jobs.
What happens in advanced economies is central to global prospects; and, despite their stronger performance recently, the risks of stagnation and deflation continue to loom large. Central banks should return to more conventional monetary policies only when robust growth is firmly rooted.
The United States has long been the main engine driving the global economy, and private demand there has regained vigor. But key challenges lie ahead.
For example, it is vitally important that policymakers follow through on the recent budget agreement and end the political wrangling over the country’s fiscal future. Greater certainty about the direction of policy could restore growth to a level that would lift the entire global economy.
In Japan, recovery has been spurred by the mix of aggressive monetary and fiscal policies known as “Abenomics.” This is an important development.
The challenge now is to agree on medium-term fiscal adjustments and implement the structural reforms – including deregulation of product and service markets and measures to boost the share of women in the workplace – that are needed to give growth a firm foundation and finally banish the specter of deflation.
Europe is also at a key juncture. The eurozone is finally showing signs of recovery, but growth is uneven and unbalanced. While many countries are doing well, demand in general remains weak, and unemployment in the periphery remains obstinately high, particularly for young people.
One area of uncertainty for Europe is the health of its banks. The forthcoming stress tests and asset-quality review can help restore confidence and advance financial integration, but only if they are conducted well. Europe also needs to boost demand, strengthen its financial and fiscal architecture, and put in place structural reforms to ensure sustained growth and job creation.
Over the past half-decade, the emerging markets have been in the vanguard of economic recovery: together with developing countries, they have accounted for three-quarters of global GDP growth. But these economies’ momentum slowed in 2013, as uncertainty about the timing of monetary-policy normalization in the US coincided with doubts about the sustainability of their growth path.
While the worst fears have faded, the emerging economies face new policy challenges. In responding to slower demand, policymakers must be wary of financial excess, especially in the form of asset bubbles or rising debt. They should also focus on strengthening financial regulation, in order to manage credit cycles and capital flows more effectively, and on reestablishing fiscal room for maneuver.
Low-income countries have been a bright spot for the global economy over the last five years as well. They proved resilient in the face of crisis, and many – especially in Africa, where annual output rose by about 5% in 2013 – are enjoying strong growth. Now is the time to build on these gains, primarily by strengthening these countries’ capacity to raise revenues. With demand from emerging markets weakening, low-income countries should bolster their defenses against a serious downturn, even as they continue to focus their spending on key social programs and infrastructure projects.
Middle Eastern countries in transition face additional challenges in the form of social instability and political uncertainty. These problems should be addressed by laying the groundwork for dynamic, transparent economies, promoting more inclusive growth, and ensuring continued support from the international community.
While challenges vary by country and region, many common problems must be addressed in the years ahead. Too many countries face a legacy of high public and private debt, fiscal and current-account imbalances, and growth models that are unable to generate enough jobs. The international community also needs to complete the regulatory reforms required to create a safer financial system that better supports the needs of the real economy.
These are not abstract challenges. Only by addressing them can we ensure future prosperity at a time when billions of people have rising aspirations – to find jobs, to rise out of poverty, and to one day join the global middle class.
In 2014, we need to take the steps that would help make this dream a reality. The IMF is committed to working with its 188 member countries to define and implement the policy measures that can power the engines of growth – and lift all people to renewed prosperity.
Christine Lagarde is Managing Director of the International Monetary Fund. She is participating in the World Economic Forum’s Annual Meeting in Davos.