The global spillovers from China’s reduced rate of growth through its diminished imports and lower demand for commodities have been much larger than anticipated, and Beijing will remain on the top watch list as its economy transitions from investment and manufacturing to consumption and services, IMF’s chief economist said in an interview.
“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, Maury Obstfeld told IMF Survey.
“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,” he said.
Global markets were spooked by a sharp drop in Chinese shares on the first trading day of the New Year, raising concerns over economic stability as analysts warned investors to prepare for more wild swings in the days ahead.
Obstfeld said the positives in 2015 included solid growth and job creation in the U.S economy, as Europe generally picked up speed. Japan remained a question mark though, he added.
“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,” Obstfeld said, adding that an overlay of political or geopolitical tensions will magnify purely economic challenges in the months ahead.
“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,” he said.
Apart from China, Obstfeld said he was also concerned about 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,” he said.
Obstfeld said emerging markets will be at center stage in 2016.
“Capital inflows are down, some reserves have been spent, sovereign spreads have widened, currencies have weakened, and growth is slowing sharply in some countries. Currency depreciation has proved so far to be an extremely useful buffer for a range of economic shocks. Sharp further falls in commodity prices, including energy, however, would lead to even more problems for exporters, including sharper currency depreciations that potentially trigger still-hidden balance sheet vulnerabilities or spark inflation,” he said.
He further said that It will be critical how the U.S. Fed manages subsequent interest-rate increases during 2016 and how it communicates with the market—a task it seems to have commenced on the right foot at the end of 2015.
“But there is no doubt that global financial conditions are tightening, and emerging and developing markets are especially sensitive to the effects, given other current woes.”