global activity strengthening,
TRANSCRIPT
GLOBAL ACTIVITY STRENGTHENING, WITH RISING DISPERSION AND UNCERTAINTY
1
Global and Regional Economic Developments and Policy Priorities in the Pacific
PFTAC Steering Committee MeetingHoniara, Solomon Islands
March 15-16, 2017
Chikahisa SumiDirector
IMF Regional Office for Asia and the Pacific (OAP)Tokyo, Japan
Global activity strengthening, with rising dispersion and uncertainty
• Global growth: uneven pick up
– Advanced Economies (AE): improving performance primarily from the US, plus upward revision to Japan’s growth rates, growth in other countries at sluggish rates
– Emerging Market and Developing Economies (EMDE): near-term growth prospects revised up, primarily from China, but substantial weakening in a few large economies
• Dispersion of outcomes is large, given uncertainty surrounding U.S policies and its global ramifications
• Policy priorities: differ across individual economies, but action relying on all levers is needed to reduce uncertainty and head off further growth disappointments
2
Multiple forces and realignments shaping the outlook
Advanced economies
• Changing policy mix, U.S.• Remaining post-crisis repair• Fraying globalization consensus
Emerging market and developing economies
• Rebalancing in China• Tightening financial conditions• Idiosyncratic shocks
3
Firming of oil and some other commodity prices
Multiple forces and realignments shaping the outlook
WorldAdvanced
Economies U.S. U.K. Japan Euro Area Germany Canada
Other Advanced
Asia
2016 3.1 1.6 1.6 2.0 0.9 1.7 1.7 1.3 2.0
2017 3.4 1.9 2.3 1.5 0.8 1.6 1.5 1.9 2.3
Revision from Oct.
20160.0 0.1 0.1 0.4 0.2 0.1 0.1 0.0 -0.2
2018 3.6 2.0 2.5 1.4 0.5 1.6 1.5 2.0 2.6
Revision from Oct.
20160.0 0.2 0.4 -0.3 0.0 0.0 0.1 0.1 -0.1
Growth projections: Advanced economies (percent change from a year earlier)
Sources: IMF, World Economic Outlook January 2017 Update; and IMF, World Economic Outlook October 2016.4
World
Emerging Market and Developing Economies China India Brazil Russia
Commodity Exporting
Economies
Low IncomeDeveloping Countries
2016 3.1 4.1 6.7 6.6 -3.5 -0.6 1.0 3.7
2017 3.4 4.5 6.5 7.2 0.2 1.1 2.4 4.7
Revision fromOct. 2016 0.0 -0.1 0.3 -0.4 -0.3 0.0 -0.1 -0.2
2018 3.6 4.8 6.0 7.7 1.5 1.2 2.9 5.4
Revision fromOct. 2016 0.0 0.0 0.0 0.0 0.0 0.0 -0.1 0.2
Growth projections: Emerging markets and LIDCs(percent change from a year earlier)
Sources: IMF, World Economic Outlook January 2017 Update; and IMF, World Economic Outlook October 2016. 5
Asia remains the global growth engine
6
Growth Projections: Selected Asia and Pacific(percent change from a year earlier)
World Asia China Japan India
Australiaand New Zealand ASEAN
APD Small Pacific Islands
2016 3.1 5.2 6.7 0.9 6.6 2.3 4.8 2.9
2017 3.4 5.3 6.5 0.8 7.2 2.7 4.8 3.4
2018 3.6 5.3 6.0 0.5 7.7 3.0 5.1 3.2
Source: IMF staff.Note: Figures for India are on a fiscal year basis.
Signs of inflation bottoming out
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
1/3/2014 9/3/2014 5/3/2015 1/3/2016 9/3/2016
Inflation Swap Forward rate 5Y5
USD EUR JPY
Source: Bloomberg, L.P.
1/13/2017
7
Near-term uptick on solid footing
8
47
48
49
50
51
52
53
54
55
56
Global: Purchasing Managers' Index(SA, 50+=Expansion)
Composite Manufacturing Services
Source: JP Morgan/ IHS Markit/ Haver Analytics.
Risks are two-sided, skewed to the downside
• Stronger growth. Support to activity from policy stimulus in the Unites States and China could turn out stronger than expected with possible positive confidence effects globally.
• Protectionism. Inward-looking policy approaches could harm trade and integration, leading firms to defer investment and hiring decisions.
• Stagnation in AEs. An extended period of weak demand could lead to persistently lower output and inflation in advanced economies. An unmooring of inflation expectations could raise real interest rates and weaken demand further.
• China’s transition. China’s rebalancing path could prove bumpier than expected. With continued reliance on credit and slow restructuring, the risk of an eventual disruptive adjustment is growing.
• Financial threats to EMs. Underlying vulnerabilities in some large EMs (high corporate debt, declining profitability, and weak balance sheets) together with the need to build policy buffers still leave EMDEs exposed to sudden shifts in investor confidence or surprises in U.S. monetary tightening.
• Non-economic shocks. Geopolitical risks and other factors ranging from droughts to terrorism could hurt sentiment 9
Rising long term yields and US dollar strengthening
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
1/1/2013 2/1/2014 3/1/2015 4/1/2016
United States United KingdomGermany U.S. German bond yield spreadJapan
Source: Haver Analytics.
1/12/2017
Advanced Economies: 10-Year Government Bond Yields(In percent)
80
85
90
95
100
105
110
115
120
1/1/2016 3/16/2016 5/30/2016 8/13/2016 10/27/2016
yen pound euro Swiss franc
Bilateral Exchange Rate Movements against USD(Percent change; positive = local currency appreciation)
Sources: Bloomberg L.P.; and IMF staff calculations.
1/9/2017
10
Asia vulnerable to trade shocks: mind the global value chains
11
02468
1012141618
Exports to the United States(In percent of GDP)
Sources: Haver Analytics, World Economic Outlook; and IMF staff calculations.
02468
1012141618
Trade in Value Added to the United States(In percent of GDP)
Sources: OECD, World Economic Outlook; and IMF staff calculations.
Policies: reinvigorate growth, improve its distribution, and make it durable
Comprehensive and consistent three-pronged approach to growth
• Accommodative monetary and fiscal policy is needed but not enough, with data dependent normalization and buffers and growth-friendly policies in EMDEs
• Fiscal support must be tailored to available space and focus on fostering structural reforms• Structural reforms—prioritized to maximize impact—are essential
Comprehensive and consistent three-pronged approach to growth
• Accommodative monetary and fiscal policy is needed but not enough, with data dependent normalization and buffers and growth-friendly policies in EMDEs
• Fiscal support must be tailored to available space and focus on fostering structural reforms• Structural reforms—prioritized to maximize impact—are essential
Also need to enhance financial stability• Complete and implement regulatory reform• Continue to build systemic resilience, strengthen bank business models and reform industry structure• For EMDEs, ensure buffers against vulnerabilities and address financial and corporate imbalances
Also need to enhance financial stability• Complete and implement regulatory reform• Continue to build systemic resilience, strengthen bank business models and reform industry structure• For EMDEs, ensure buffers against vulnerabilities and address financial and corporate imbalances
Reinvigorate multilateral cooperative efforts• Sustainably higher and inclusive growth needs comprehensive, well-balanced and well-communicated policies• Refocus the trade discussion towards the benefit of integration and policies to mitigate side effects• Address cooperatively other public-good problems, including refugees, between-country inequality, and climate
change
Reinvigorate multilateral cooperative efforts• Sustainably higher and inclusive growth needs comprehensive, well-balanced and well-communicated policies• Refocus the trade discussion towards the benefit of integration and policies to mitigate side effects• Address cooperatively other public-good problems, including refugees, between-country inequality, and climate
change
112
APD Small States and Pacific Island Countries: growth is moderate and inflation remains low
-2-1012345678
PNG
Bhut
an Fiji
Tuva
lu
Vanu
atu
Mic
rone
sia
Kirib
ati
Tong
a
Mar
shal
l Isl
ands
Mal
dive
s
Solo
mon
Isla
nds
Sam
oa
Pala
u
Tim
or-L
este
Inflation 2016(In percent)
-101234567
Fiji
Kirib
ati
Micr
ones
ia
Pala
u
PNG
Sam
oa
Solo
mon
Isla
nds
Tim
or-L
este
Tong
a
Tuva
lu
Vanu
atu
Real GDP Growth(in percent)
Average (2012-2015) 2016
External positions diverged (low oil prices and natural disasters) but reserves are generally comfortable
0
2
4
6
8
10
12
Bhut
an
Solo
mon
Isla
nds
Vanu
atu
Tuva
lu
Tong
a
Fiji
PNG
Sam
oa
Tim
or L
este
Mal
dive
s
Pala
u
Mic
rone
sia
2015
2016
Reserve Levels(In months of imports)
-25
-15
-5
5
15
25
35
Fiji
Kirib
ati
Micr
ones
ia
Pala
u
PNG
Sam
oa
Solo
mon
Isla
nds
Tim
or-L
este
Tong
a
Tuva
lu
Vanu
atu
Current Account Balance (in percent of GDP)
Current Account Balance (Average 2012-14) Average (2015-16)
Monetary conditions remain accommodative… and credit growth quite rapid
15
0
5
10
15
20
25
Tonga Bhutan Samoa SolomonIslands
Fiji Maldives PapuaNew
Guinea
Vanuatu
2015
2016, latest available 1/
Growth of Domestic Credit to Private Sector (In percent, year-on-year)
1/ December for Fiji and Maldives; November for Tonga; October for Bhutan, Samoa, Solomon Islands and Vanuatu; September for PNG.
-5
0
5
10
15
20
25
30
PNG Fiji Tonga Samoa Timor-Leste Vanuatu SolomonIslands
Broad Money Growth(annual percentage change)
2013-15 Average
Sources: IMF World Economic Outlook and IMD
Fiscal positions look to have deteriorated in 2016
-20
-10
0
10
20
30
40
50
Mic
rone
sia
Mar
shal
l Isl
ands
Sam
oa
Bhut
an
Tong
a
Solo
mon
Isla
nds
Pala
u
Tuva
lu
PNG Fiji
Mal
dive
s
Vanu
atu
Kirib
ati
Tim
or-L
este
2015 2016
Overall Balance - APD small states and Pacific islands(In percent of GDP)
0
20
40
60
80
100
120
Bhut
an
Mal
dive
s
Tuva
lu
Sam
oa Fiji
Tong
a
PNG
Mar
shal
l Isl
ands
Vanu
atu
Kirib
ati
Pala
u
Mic
rone
sia
Solo
mon
Isla
nds
Tim
or-L
este
2013 2016
Total Public Debt - APD small states and Pacific islands (In percent of GDP)
Caribbean average, 2016
Volatile revenue led to procyclical policy
0
2
4
6
8
10
12
14
-40 -20 0 20 40 60 80 100
Fisc
al im
pulse
(In p
erce
nt o
f GDP
)
Change in terms of trade (in percent)
PICs
Other small states
Fiscal Impulse and Terms of Trade, 2005-12
Countercyclical Procyclical
Large share of current spending and wage bill
0102030405060708090
100Current Expenditure Capital Expenditure
Source: IMF Staff Reports
Current vs Capital Expenditure, Average 2012-15( In percent of GDP)
05
1015202530354045
Wage Bill: Percent of GDP (2014)
Sources: IMF Staff Estimates
Limited capital spending led to infrastructure gaps
0
20
40
60
80
100
Sam
oa
Tong
a
Vanu
atu Fiji
Pala
u
Mic
rone
sia
Kirib
ati
Solo
mon
Isla
nds
Tim
or-L
este
Mar
shal
l Isla
nds
PNG Fiji
Pala
u
Vanu
atu
Solo
mon
Isla
nds
Tim
or-L
este
Tong
a
Sam
oa
PNG
Tuva
lu
Mic
rone
sia
Kirib
ati
Mar
shal
l Isla
nds
Sam
oa
Tong
a
Vanu
atu Fiji
Solo
mon
Isla
nds
Pala
u
PNG
Kirib
ati
Mar
shal
l Isla
nds
Mic
rone
sia
Tim
or-L
este
Living standards outcome(Life expectancy at birth)
Infrastructure quality(Mobile cellular subscriptionsfor every 100 persons)
Business climate (Ease of Doing Business Score)
High
er p
erfo
rman
ce
Pacific Island Countries: Structural Indicators(Percentile ranks) Priorities are
country-specific, but generally include:
Addressing the infrastructure bottleneck Increasing living
standards Improving the
business climate
Small States of the Pacific: Risks to the Outlook
0 10 20 30 40 50
Palau
Marshall Islands
Kiribati
Timor-Leste
Tuvalu
Micronesia
Caribbean small states
Samoa
Tonga
Solomon Islands
Vanuatu
Fiji
1/ During 1970-2014.Sources: Center for Research on Epidemiology for Disasters, International Disaster Database; IMF staff estimates.
Small Pacific island countries
Probability of Occurrence of Natural Disasters1
(Percent)
20
Shocks related to climate change •Natural disasters (cyclone, drought, floods, etc.)
External economic spillovers •Global and regional economic slowdown, including the spillovers through Australia and New Zealand•Volatility in global financial condition•De-risking
Domestic specific factors
Macroeconomic challenges
Fiscal: Volatile fiscal revenue led to procyclical policy; Large current spending created budget rigidities; Limited capital spending contributed to infrastructure bottleneck; Limited fiscal buffers reduced policy options.
Monetary: Relatively fixed exchange rate and large bank’s excess liquidity provide little room for monetary policy. In most countries, monetary policy has been accommodative.
Growth: Limited sources of growth; infrastructure bottleneck; high cost of financing; other structural issues (such as land) that hamper private sector developments.
Policy Priorities
• Build economic resilience to natural disasters and climate change: build policy buffers
• Enhance fiscal framework: fiscal anchor to manage revenue volatility, strengthen medium-term fiscal framework
• Strengthen revenue (tax, nontax) policies and administration
• Reform public financial management to improve quality of spending and close infrastructure gap
• Build financial stability: strengthen supervision/regulation, manage risks from rapid credit growth.
• Raise growth potential: invest in infrastructure, strengthen business climate, promote private sector development
• Improve the quality of statistics to facilitate policy formulation and business decisions
• Tanggio Tumas
23
Backup slides– with more on risks
24
ADVANCED ECONOMIESUNEVEN PROGRESS WITH RECOVERY
25
Output still below potential
26
-8-7-6-5-4-3-2-101
Output Gap(In percent of potential GDP)
Maximum output gap (2008-17)
2017
Source: IMF World Economic Outlook.
Labor market scars still visible
27
0
5
10
15
20
25
2007 2016
Source: IMF World Economic Outlook.
Unemployment Rate(Percent of the Labor Force)
EMERGING MARKET AND DEVELOPING ECONOMIES
28
Rebalancing in China
The share of industry in GDP is shrinking… …as is the share of investment
29
38
40
42
44
46
48
50
52
0
2
4
6
8
10
12
14
16
2007 2008 2009 2010 2011 2012 2013 2014 2015
Real GDP (YoY, percent)Industry (Including construction; RHS)Services(RHS)
Source: CEIC
Share of Gross Value Added(In percent of GDP)
35
37
39
41
43
45
47
49
51
53
55
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Investment: Nominal Investment: RealConsumption: Nominal Consumption: Real
Source: IMF World Economic Outlook.
Share of Gross Value added by Expenditue(In percent of GDP)
30
With vulnerabilities from continued reliance on credit
80
90
100
110
120
130
140
150
160
170
180
0
5
10
15
20
25
30
35
40
08Q1 09Q1 10Q1 11Q1 12Q1 13Q1 14Q1 15Q1 16Q1
Real Credit Growth (YoY)
Private Sector Credit to GDP Ratio (RHS)
Sources: Haver Analycis; and IMF Staff Estimates.
16Q4
China: Rising Dependence on Credit(In percent)