Economies stuck at stall speed may yet relapse

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Nothing new since nothing has changed for ages... otherwise why would hard assets be way beyond the reach of younger and younger generations and unemployment rates be so high globally...

Economies stuck at stall speed may yet relapse
Stephen Roach
1040 words
1 Sep 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
World growth Central bank monetary expansion has become a substitute for structural reforms needed to entrench growth. Stephen Roach

Relapse is the rule in the post-crisis global economy. In the United States, Japan and Europe, gross domestic product growth faltered again in the first half of 2014. These setbacks are hardly a coincidence. Persistent sluggish growth throughout the developed world has left major economies unusually vulnerable to the inevitable bumps in the road.

Sure, there are excuses – there always are. A contraction in the US economy in the first quarter of the year was dismissed as weather-related. Japan's plunge in the second quarter was blamed on a sales-tax hike. Europe's stagnant growth in the second quarter has been explained away as an aberration reflecting the confluence of weather effects and sanctions imposed on Russia.

As tempting as it may be to attribute these developments to idiosyncratic factors, the latest slowdown in developed countries is not so easily dismissed. Lacking cyclical vigour in the aftermath of severe recessions, today's economies are finding it especially difficult to shrug off the impact of shocks and break out of anaemic growth trajectories.

Consider the US. Though annual GDP growth is estimated to have rebounded to 4 per cent in the second quarter of 2014, following the 2.1 per cent first-quarter contraction, that still leaves average growth in the first half of the year at a measly 1 per cent.

The problem is even worse in Japan, where consumers brought forward expenditures in anticipation of the sales-tax hike. The 6.1 per cent first-quarter growth surge to which this gave rise was more than offset by a 6.8 per cent second-quarter contraction. The net result in the first half of this year – an average decline of 0.3 per cent – is broadly in line with the 0.2 per cent contraction now estimated for the fourth quarter of 2013. With the trajectory of real (inflation-adjusted) growth having moved into negative territory, on average, for three consecutive quarters, Japan may once again be reverting to recessionary form.

Europe's fragile economy has similarly failed to recover strongly enough to ward off periodic growth setbacks. During the acute phase of the euro crisis, recession was concentrated in peripheral economies such as Greece, Portugal and Spain. Now, however, the malaise has spread to the core economies of Germany and Italy, both of which contracted in the second quarter, and to France, which recorded zero growth. As a result, annual growth in the 18-country euro zone slipped to just 0.4 per cent in the first half of 2014. This poor performance can only exacerbate the European Central Bank's deflationary concerns.Low growth in developed world

Collectively, the annual growth rate in the major developed economies averaged a little less than 0.7 per cent in the first half of 2014. America's paltry 1 per cent growth led the way, while Japan and Europe, whose combined GDP is roughly equal to that of the US in purchasing power-parity terms, recorded no better than a 0.3 per cent increase. On balance, that is easily 1-1.5 percentage points below the developed world's longer-term, or potential, growth trend – a worrisome outcome, to say the least, for employment, deflation risk, global trade, and export-dependent developing economies, such as China, which remain heavily reliant on external demand in developed countries.

But there is another problem with persistently sub-par growth: It provides no cushion to shield economies from unexpected blows. That is especially true when growth falls below 1 per cent, leaving a thin margin between expansion and contraction. Such sluggish performance is the economic equivalent of "stall speed" – the heightened vulnerability that aircraft can encounter at low velocity.

The analogy is all too apt today. Shocks, whether traceable to weather, geopolitical disturbances, strikes, or natural disasters, are the rule, not the exception. When hit by them, vigorously growing economies have cushions to withstand the blows and the resilience to shrug them off. Economies limping along near stall speed do not. The odds of a recessionary relapse in an environment of unusually weak growth – very much the problem today – should not be minimised.

The big question is what should be done about it. The current approach, centred on unconventional monetary policy, is not the answer. Though monetary policy provided a powerful antidote to frozen credit markets in the depth of the global financial crisis, it has failed to spark classic cyclical recoveries. That should be no surprise. The world's major developed economies are not suffering from cyclical deficiencies in aggregate demand that are amenable to a monetary cure. As the Bank for International Settlements correctly points out, they are still struggling in the aftermath of wrenching balance-sheet recessions.Structural issues remain

In the US, a lingering overhang of household debt implies that deleveraging and the rebuilding of savings continues to take precedence over discretionary consumption. In Japan, long-standing structural problems, such as ageing, labour-market rigidities, and a generalised productivity malaise, can be addressed only through the so-called "third arrow" of Prime Minister Shinzo Abe's reform agenda, which remains woefully incomplete. And Europe faces a desperate need to build pan-European institutions to ensure banking and fiscal union, and to address serious competitiveness problems in France and Italy.

Unfortunately, the more that central banks give the impression that they are on the case, and the more that markets cheer them on, the less pressure there is on politically gridlocked governments to deploy fiscal policy and push through structural reforms. Moreover, the fixation on monetary accommodation leaves slow-growth, balance sheet-constrained economies stuck at stall speed, increasing the risk of yet another global growth relapse. Myopic authorities need to take less guidance from frothy financial markets and focus more on the structural repair of a post-crisis world. This is a time for heroes, not cheerleaders.

Stephen Roach is a faculty member at Yale University and former chairman of Morgan Stanley Asia, as well as author of Unbalanced: The Codependency of America and China.


Fairfax Media Management Pty Limited

Document AFNR000020140831ea9100025

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OECD warns on global growth
AAP AND DOW JONES NEWSWIRES SEPTEMBER 16, 2014 8:00AM

The OECD has said monetary policies in the major economies are set to diverge, with the US Federal Reserve and the Bank of England ending their easing policies at a time when the European Central Bank may have to provide even more stimulus.

Earlier this month, the ECB announced new cuts to its key interest rates along with two bond-buying programs, having cut rates in June and announced a program of cheap loans for eurozone banks.

"The euro area needs more vigorous monetary stimulus," the OECD said.

The OECD said the Bank of Japan may also need to provide more stimulus to accompany a second increase in the sales tax planned for 2015.

But governments also need to play their part, the research body said, listing a number of "structural reforms that are needed to get the global economy growing at a fast enough pace to quickly reduce high levels of unemployment. They include increased investment in infrastructure in the US, the completion of a banking union in the eurozone, tax simplification in India and Brazil, and a reduction in taxes on employment in France.

"The continued failure of the global economy to generate strong, balanced and inclusive growth underlines the urgency of ambitious reform efforts," the OECD said.

Meanwhile, in an economic assessment prepared for this weekend's G20 finance ministers and central bankers meeting in Cairns, the OECD has trimmed most of its 2014 and 2015 growth forecasts for large economies.

It chopped by a third its 2014 eurozone forecast to 0.8 per cent from the 1.2 per cent expansion it had projected in May.

While it said the moderate US economic expansion remains broadly on track, the OECD cut the 2014 forecast by a fifth to 2.1 per cent from 2.6 per cent.

Japan's forecast was cut by a quarter, to 0.9 per cent from 1.2 per cent, although the OECD said it expected the underlying recovery in the economy to reassert itself following the dent to growth caused by an April sales tax increase.

The OECD did not provide an update to its forecast for global growth this year, which it forecast at 3.4 per cent in May.

Among the major emerging economies which are not OECD members, China's forecast was held steady at 7.4 per cent. It said the world's number two economy "has so far managed to achieve an orderly growth slowdown to more sustainable rates."

It slashed the forecast to Brazil to 0.3 per cent growth in 2014 from 1.8 per cent after the country fell into recession in the first half of this year.

India was the sole gainer, with the OECD lifting its forecast to 5.7 per cent from 4.9 per cent thanks to a boost of confidence in the country that the new government will pursue growth-oriented reforms and progress in containing inflation.

The assessment also warned the tepid rate of growth means unemployment will remain high and trade will remain sluggish.

"The continued failure of the global economy to generate strong, balanced and inclusive growth underlines the urgency of ambitious reform efforts," OECD says in the report released on Monday.

Interest rates must remain supportive in all major advanced economies, the report said, while most countries need to make further progress on fiscal consolidation to ensure debt burdens remain sustainable.

There are many significant risks to the near-term outlook, including continued subdued growth in the euro area.

Geopolitical risks have grown in recent months, with an intensification of conflicts in Ukraine and the Middle East and increasing uncertainty about the outcome of the referendum on Scottish independence, the Paris-based institution says.

The bullishness of financial markets, as some equity market reach record highs, appears at odds with the intensification of several significant risks.

"This highlights the possibility that risk is being mispriced and the attendant dangers of a sudden correction," the report says.

Mr Hockey will co-host the two-day Cairns meeting with Reserve governor Glenn Stevens. It will set the framework for the Brisbane leaders meeting in November.

Latest OECD growth forecasts for largest economies (change since May)

US - 2014 - 2.1 per cent(-0.5), 2015 - 3.1 (-0.4)

Euro area - 0.8 (-0.4), 1.1 (-0.6)

Japan - 0.9 (-0.3), 1.1 (-0.2)

Germany - 1.5 (-0.4), 1.5 (-0.6)

France - 0.4 (-0.5), 1.0 (-0.5)

Italy - -0.4 (-0.9), 0.1 (-1.0)

UK - 3.1 (-0.1), 2.8 (+0.1)

Canada - 2.3 (-0.2), 2.7 (0.0)

China - 7.4 (0.0), 7.3 (0.0)

India - 5.7 (+0.8), 5.9 (0.0)

Brazil - 0.3 (-1.5), 1.4 (-0.8)

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G20 growth may miss target by 25pc, IMF says
PUBLISHED: 0 HOUR 6 MINUTES AGO | UPDATE: 0 HOUR 0 MINUTES AGO

G20 growth may miss target by 25pc, IMF says
IMF managing director Christine Lagarde told a meeting of finance ministers and central bank heads on Saturday in Cairns that the fund’s research showed the plans would only spur the global economy by 1.5 per cent. Photo: Bloomberg

JACOB GREBER Economic correspondent

Group of 20 countries are set to fall short of boosting global growth by 2 per cent over the next five years by as much as a quarter, according to an International Monetary Fund analysis.

More than 900 proposals for action have been submitted by countries to reach the target.

But IMF managing director Christine Lagarde told a meeting of finance ministers and central bank heads on Saturday in Cairns that the fund’s research showed the plans would only spur the global economy by 1.5 per cent.

At the same time, the starting point for the boost has been pushed back after global growth was revised lower for 2014 and 2015.

Other estimates put the likely increase to growth from the G20 plan closer to 1.8 per cent, the meeting heard according to a briefing by French finance minister Michel Sapin late on Saturday.

Australia, which is chairing this year’s G20, brokered agreement at a meeting of finance ministers in February to have nations put up concrete plans to meet the goal by the time of the November leader’s summit in Brisbane.

Mr Sapin described the fact the G20 was now scrambling to find additional longer-term growth while simultaneously coping with a near-term slump as a “form of contradiction.”

Mr Sapin said the 2 per cent target was “still topical” and that members were now pushing for “a little bit more” so that the final proposal to Brisbane was credible.

However, in reference to a growing split within the G20 about how countries should reach the longer-term goal, Mr Sapin repeatedly emphasised that the immediate focus should be on measures that supported “short-term” growth to offset the recent softening, particularly in Europe, which is set to suffer another year in 2015 of anaemic growth.

“The immediate concern is to recover growth,” Mr Sapin said.

Germany, which is enjoying strong trade surpluses, has come under pressure from the US and the IMF to do more to revive the euro zone’s sluggish economy, but remains committed to restoring the region’s budget deficits.

Reuters quoted a German G20 delegate arguing that in most countries debt was still too high to allow for increased spending.

“We will not agree on short-sighted stimuli,” the delegate said.

The finance ministers’s summit concludes around midday on Sunday.

The Australian Financial Review

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http://www.businesstimes.com.sg/premium/...o-20140923

PUBLISHED SEPTEMBER 23, 2014
Rate hike fears overdone, again: Amundi CIO
Stagnating growth in the West and excess liquidity in Europe and Japan will keep rates low

BYCAI HAOXIANG
haoxiang@sph.com.sg @HaoxiangCaiBT

Fears of an interest rate hike are still overdone, said asset manager Amundi's group chief investment officer Pascal Blanque - PHOTO: ST
[SINGAPORE] Fears of an interest rate hike are still overdone, said asset manager Amundi's group chief investment officer Pascal Blanque.
He said stagnating economic growth in the West and excess liquidity in Europe and Japan will mean continued low rates and thus, higher asset prices. For example, equilibrium real estate prices and price-earning ratios will be higher.
"Valuations are less stretched today than we may fear," he said.
But a low-growth world will mean lower returns, and investors have to adjust their expectations accordingly, he said.

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Interest rates on hold as IMF warns five years of low growth looms
THE AUSTRALIAN OCTOBER 08, 2014 12:00AM

David Uren

Economics Editor
Canberra

THE global economy faces another five years of stagnation, the International Monetary Fund warned overnight as it cut its growth forecasts for the third year in a row and urged nations to ­reinvigorate economic reforms.

Releasing the fund’s updated economic outlook, IMF chief economist Olivier Blanchard ­described global growth as ­“mediocre” and, in a reference to the agenda Australia has set for the G20 members ahead of next month’s summit in Brisbane, said the difficult outlook underlined the importance of identifying economic reforms that could lift output.

RBA statement

“Potential growth rates are being revised downward and these worsened prospects are in turn affecting confidence, demand and growth today,” he said.

The Reserve Bank is expecting Australia’s growth to remain below its long-term trend rates, announcing after its board meeting yesterday that rates would be kept at their record low of 2.5 per cent for the 14th consecutive month and would remain stable into the future. It is the second-longest period of interest rate ­stability on record, with economists predicting rates to remain on hold until at least next year.

Reserve Bank governor Glenn Stevens highlighted concerns about the Chinese economy and the value of the Australian dollar, which despite recent falls to below US87c remained high, given the sharp drop in prices for Australia’s key export commodities.

The IMF says the global economic recovery remains “fragile and uneven”. It now expects world growth will reach 3.3 per cent this year, the same as last year, and 1.4 percentage points lower than it thought likely when preparing its forecasts three years ago. Before the financial crisis, global growth rates in excess of 5 per cent were the norm.

The fund says growth should lift to 3.8 per cent next year, helped by better performance in a few nations led by the US and Britain, but there is a danger there will be no further improvement in growth for an extended period.

“Demand shortfalls in advanced economies, together with the erosion of potential output, could lead to sustained global economic weakness over a five-year period,” the IMF report says. This is not yet its central forecast, but the fund sees it as the biggest risk to the global economy over the medium term.

The IMF believes share and other financial markets are not taking full account of the risks in the world economy, with Mr Blanchard warning that “financial markets may be too complacent about the future”.

The IMF’s modelling shows that a scenario in which growth did not rise above 3.7 per cent would result in advanced economy inflation rates dropping to 1 per cent and cause sharp falls in investment, employment growth and commodity prices.

The IMF forecasts for Australia’s growth of 2.8 per cent this year and 2.9 per cent next year are consistent with Treasury estimates. Like Treasury, it expects unemployment to remain above 6 per cent at least to the end of next year.

The IMF reviews its global forecasts four times a year and has been downgrading its estimates on every occasion since October 2011.

Mr Blanchard said this forecast failure was partly because legacies of the global financial crisis, including high government debts and elevated unemployment, had proven more intractable than expected. However, he said poor productivity growth and declining labour force participation meant the potential growth rates of both advanced and emerging economies were being revised lower and this was depressing investment.

The IMF is also concerned about the outlook for China. It is expected to grow by 7.1 per cent next year, down from the 7.3 per cent expected in April, but the fund says there is a risk of a much weaker result.

“Real estate investment has been an important engine of growth in China, and it will be challenging to allow the imbalances in the market — including signs of overvaluation in large cities and oversupply in many smaller cities — to correct while preventing an excessively sharp slowdown,” its report said. “Risks of a hard landing in China in the medium term owing to excess capacity and the credit overhang remain a concern, given that investment and credit continue to be the main drivers of growth.”

Mr Stevens also pointed to the RBA’s concerns, saying China’s growth appeared to have softened in recent months and “weakening property markets there present a challenge in the near term”.

Speaking from New York, Joe Hockey said yesterday he remained confident about China’s outlook. The Treasurer told the Bloomberg news service that some commentators were “far too bearish” on China.

“I do not believe the Chinese government is going to permit China to have a significant economic deterioration from what is near 7.5 per cent growth,” he said.

Mr Stevens also indicated that the fall in the Australian dollar, which has dropped 6 per cent since the RBA’s meeting last month, remained high given the fall in export prices, with iron ore prices having dropped 20 per cent in the past three months. He said the exchange rate was “offering less assistance than would normally be expected in achieving balanced growth in the economy”.

The IMF said some increase in asset prices, such as shares, was reasonable given continued low interest rates worldwide and reduced risks of major catastrophe, such as the breakup of ­Europe.

The fund also noted Australia was among 17 nations with booming housing markets, while there were 33 nations where housing markets were yet to recover fully from the global financial crisis.

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Will IMF get it right this time?
BUSINESS SPECTATOR OCTOBER 09, 2014 12:00AM

The IMF's wobbly worries

AT the same time as lowering its forecast for growth and raising the probability of a global recession from 20 to 33 per cent, the IMF has published a bracing examination of its failures.

Chief economist Olivier Blanchard assigned a couple of his economists, Rupa Duttagupta and Thomas Helbling, to report on why he and his team keep getting it wrong.

Specifically, the IMF has been way too optimistic on global growth every year since 2010 — by an average of 0.6 per cent a year. In 2010 global growth was 5.4 per cent and has declined to 3.3 per cent, which has come as a complete surprise to the IMF.

The analysis shows that IMF got its forecasts for developing countries most wrong and it didn’t predict the severity of the downturn in Europe. The growth shortfalls have been partly explained by lack of growth in trading partners and partly by forecast errors about domestic investment.

So how much weight should we put on the IMF team’s latest attack of pessimism? Well, at least they are diligent and honest, and in any case, grains of salt should always be applied to forecasts, especially about the future. It’s the analysis that matters.

The IMF’s official global growth forecast for 2014 is now 3.3 per cent, down from 3.5 per cent in April. Growth is expected to increase to 3.8 per cent next year, 0.2 per cent less than its April forecast.

But as Olivier Blanchard wrote in his blog: “This number hides, however, very different evolutions. Some countries have recovered or nearly recovered. But others are still struggling.”

The US and UK are “leaving the financial crisis behind” and achieving decent growth. Japan is growing but high public debt raises challenges.

For Europe, the IMF has doubled its one-year ahead recession risk to nearly 40 per cent and the probability of deflation 30 per cent.

And this was immediately seen last night in a 4 per cent drop in Germany’s industrial production in August, its biggest fall in five years.

France and Italy are already contracting. The only bright spot for Europe is the devaluation of the currency, which has fallen 9 per cent against the US dollar since May.

Despite the deterioration in Germany’s economy, there is no sign yet that the Merkel Government is rethinking its formula for economic success in the eurozone of fiscal rectitude and structural reform, but others certainly are. France and Italy have both revised their deficit reduction targets and the unions and the political left are mounting staunch resistance to any reforms.

Germany’s unit wage costs remain well below those of the rest of Europe, thanks largely to its lower house prices, but while the lower exchange rate is helping as well, weak demand both in Europe and China is crushing German exports.

The IMF raises three key risks to its outlook, of which a stalling of the recovery in the euro area is one. Says Blanchard: “This is not our baseline, as we believe fundamentals are slowly improving, but, were it to happen, it would clearly be the major issue confronting the world economy.”

The other two risks are complacent financial markets (“policymakers should be on the lookout”) and geopolitical risks, which are not having much impact at the moment, but “clearly, the risk that they do so in the future is there, and could affect the world economy in a major way”.

The IMF has also included an update on global housing markets in last night’s World Economic Outlook.

In short, it says there are two speeds: “rebounded” and “recovering” (a euphemism for falling, it seems).

Australia, of course, is in the “rebounded” group, but the short paragraph of commentary on our housing market is unperturbed:

“The rise in prices is concentrated in Sydney, Melbourne and Perth. It has not been accompanied by an overall increase in leverage. Credit growth is moderate, and many households continue to pay down debt.”

In fact, it is clear from reading the commentary on the other countries whose housing markets have rebounded, that the IMF seems to be about the least worried about Australia’s.

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IMF warns heavy reliance on low interest rates poses threat to the global economy
By HUGO DUNCAN FOR THE DAILY MAIL

PUBLISHED: 22:46 AEST, 8 October 2014 | UPDATED: 22:46 AEST, 8 October 2014

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Ultra-low interest rates pose a threat to the global economy as they encourage risky borrowing and investments, the world’s leading watchdog warned today.

The International Monetary Fund said that six years after the start of the crisis the recovery around the world ‘continues to rely heavily’ on low interest rates in the West.

But it added the prolonged period of low rates – they have been frozen at 0.5 per cent in the UK since March 2009, for example – ‘may also encourage excessive financial risk taking’.

Path ahead: The latest World Economic Outlook from the International Monetary Fund and the World Bank Group is being presented at the groups 2014 annual meetings in Washington DC +1
Path ahead: The latest World Economic Outlook from the International Monetary Fund and the World Bank Group is being presented at the groups 2014 annual meetings in Washington DC

The Washington-based Fund pointed to investments in ‘riskier assets’ and an ‘increased willingness’ to take on debt.

‘Risks have increased to levels that could compromise financial stability if left unaddressed,’ it said in the Global Financial Stability Report.


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The report warned that a return to more normal conditions in credit markets could reduce the value of global bond portfolios by more than 8 per cent or in excess of $3.8trillion – triggering ‘significant disruption in global markets’.

The warning came just a day after the IMF said the recovery around the world ‘continues but is weak and uneven’.

The Fund said the UK and the US are ‘leaving the financial crisis behind’ but warned that the eurozone faces possible recession and deflation.

Britain is expected to be the fastest growing major economy in the developed world this year – expanding at more than twice the pace of Germany and eight times as fast as France.

The IMF today said business and consumer confidence ‘remains fragile in many areas’ including the eurozone.

It said the crisis of confidence ‘continues to impede greater economic risk taking’ – the sort required to encourage businesses to ramp up investment and take on new staff.

It said that instead of promoting crucial economic risk taking, low interest rates have encouraged potentially dangerous financial risk taking among ‘complacent’ investors.

José Viñals, financial counsellor at the IMF, said: ‘Policymakers are facing a new global imbalance: not enough economic risk-taking in support of growth, but increasing excesses in financial risk-taking posing stability challenges.’

He said that although banks are safer than they were they ‘may not be strong enough to vigorously support the recovery’ through increased business lending.

‘The good news is that banks are much safer now, having increased their capital levels and liquidity,’ said Mr Viñals.

‘However, this report finds that many banks do not have the financial muscle to provide enough credit to vigorously support the recovery.’

The IMF said that of 300 large banks it analysed in advanced countries, banks holding 40 per cent of total assets ‘are not strong enough to supply adequate credit in support of the recovery’.

In the eurozone, the proportion rises to about 70 per cent, the Fund said, leaving businesses across the region starved of the cash they need to grow and prosper.

Mr Viñals said: ‘In other words, when banks are receiving a clean bill of health in terms of capital adequacy, it means that they are safe enough to lead a “normal life”. But in many countries, we need banks to be “athletes” who can vigorously support the recovery.’

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When Joe met Janet

John Kehoe and Vesna Poljak
1819 words
11 Oct 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.

Economics Although it was all politeness and charm facing the media, the pressure was on as Joe Hockey met US Fed chair Janet Yellen on the back of a serious sell-off on the Dow Jones, writes John Kehoe and Vesna Poljak.

it was all smiles for the cameras as Treasurer Joe Hockey greeted Janet Yellen, the most powerful econocrat in the world, with a kiss on the cheek at the US Federal Reserve's imposing marble headquarters on Thursday. Behind the veneer, however, a growing sense of economic uneasiness swept across the US capital, where G20 finance ministers and central bank governors are meeting this weekend for the ­International Monetary Fund's annual meeting.

In a timely wake-up call for policymakers, Wall Street was suffering its biggest sharemarket fall since July and export data out of Germany suggested Europe's biggest economy was on the brink of recession.

IMF managing director Christine Lagarde had already put economic leaders on notice that the global economy faces the threat of a "new mediocre", after the fund yet again downgraded growth forecasts for 2014.

The IMF forecasts world growth to be 3.3 per cent this year, in line with last year, yet almost 1½ percentage points lower than was predicted for 2014 three years ago.

Hockey, as chairman of the G20, was putting on a brave face and doing his best to talk up the potential for the world economy, if finance ministers were prepared to put in the hard yards of implementing unpopular economic reforms.

"Everyone is searching for momentum and there is an earnest desire to change the narrative to one of optimism rather than pessimism," Hockey told AFR Weekend in his hotel room in Washington.

But he was not oblivious to the weak position the world economy finds itself in, six years after the financial crisis blew up banks and threw tens of millions of people in the United States and Europe on to the jobless scrap heap.America can't go it alone

The US economy, still the world's largest, has recently picked up steam, with its previous double-digit jobless rate now officially 5.9 per cent – lower than Australia.

Yet the US now accounts for only about 20 per cent of world gross domestic product, down from 50 per cent at the end of World War II. America alone can't be the world's locomotive.

"I do think that there is a need for more action in quite a number of parts of the world," US Treasury Secretary Jacob Lew said this past week. "I don't think the United States alone can pull the global economy to where it needs to be."

Europe is facing a triple-dip recession and a serious deflation risk. Japan's lost decade is at risk of doubling to 20 years in the doldrums, despite recent reform efforts of Prime Minister Shinzo Abe.

China is slowing and risks are building in its opaque financial system, though the economy is still chugging along at a reasonable pace of about 7.5 per cent.

Following a shocking 5.8 per cent monthly decline in German exports, Hockey and his G20 counterparts planned to ­pressure Finance Minister Wolfgang Schäuble to take more decisive steps to ward off recession, in a dinner on Thursday night and a formal meeting on Friday.Germany critical of QE

Germany has remained steadfastly ­conservative in its policies and the Bundesbank has been openly critical of European Central Bank efforts to undertake more bold monetary initiatives. Indeed, Germany's influence could ultimately hold the ECB back from doing a Fed-style outright bond-purchasing program that many economists believe the euro zone needs to jolt it into action.

"In Europe, the countries that have undertaken structural reform are doing ­better, but there is capacity in Germany to provide some stimulation in Europe, there is no doubt about that," Hockey said hours before the dinner.

"That could be in the form of new infrastructure and I suspect there will be considerable discussion about this in the next few days. The beauty of it is [Germany is] running ­surpluses and has the capacity to be able to do a few things."

Hockey's G20 rhetoric is a neat contrast with his own challenge selling his federal budget in Australia and his calling an end to the age of entitlement.

Schäuble, the "elder statesman" – as Hockey puts it – of the G20 finance ministers club was originally sceptical of Hockey's G20 goal of lifting global economic growth by an extra 2 per cent over the next five years, a goal seeded in Sydney months ago.

But he is now firmly on board, given the malaise of neighbouring European ­governments. The plea for Berlin to build projects such as new roads, rail and bridges accords with Hockey's G20 infrastructure agenda.Historically low rates

Borrowing rates are at historically low levels. Building infrastructure can create jobs and demand in the economy in the short term, while adding to the long-term supply capacity of the economy. Good infrastructure also delivers productivity.

The Treasurer was set to gain finance ministers' support for a Global Infrastructure Centre, a hub for governments and the private sector to share information and data for new infrastructure and upgraded infrastructure across developed and emerging economies.

While it's a reasonable achievement, it is far from the panacea required to grease the wheels of commerce around the world.

The euro zone is still on its sick bed. Even the IMF's latest forecasts, which have ­repeatedly proven to be too optimistic, have the continent within a whisker of another recession.

European Central Bank head Mario Draghi warned in an address to the Brookings Institution in Washington on Thursday that there could be no recovery without structural reform.

Europe's stifling government regulation is throttling growth. Draghi cited the example of a young entrepreneur who has to wait nine months for a permit to open a new shop.

"And once he opens the new shop, he is being overburdened by taxation," he said.

Draghi is not the only central bank chief whose every uttered word is moving markets. US Fed chief Yellen, who Hockey spoke with for about an hour on Thursday morning, has whipsawed equity, bond, and currency markets with her words and Fed statements on when the central bank will lift rates from near zero.

The Fed's dovish minutes published on Wednesday revealed it was worried about weakness in Europe and Japan, so rates would remain anchored for a "considerable time".

It was what the market wanted to hear – lower rates for longer.

The significance of this guidance, and the Fed's new admission that it is concerned about the appreciating value of the US dollar and its impact on American exports, is that it suggests the Fed is not in a rush to tighten.Good news/bad news

Wall Street soared 1.7 per cent on Wednesday – its biggest gain this year. But within 24 hours, the good news faded.

On Thursday, Wall Street tanked in an alarming and unexplained fashion, ­culminating in a 1.97 per cent drop to 16659.25 points. Energy stocks and oil dragged markets down but the selling was indiscriminate.

Traders turned to the worrying German exports figures and Draghi's commentary as reasons to head for the exits. But equally, there was a sense of ambiguity in the selling that is often symptomatic of worse events to come, possibly even a correction.

When the market is looking for bad news, it acts on any data that fits the narrative.

The US sharemarket was on track for its third successive negative week heading into Friday's session and the blue-chip Dow Jones Industrial Average moved by more than 200 points for the third time in as many days, a wild turn of events underscoring the absence of volatility on global bourses this year.

Volatility appears to be returning. Wall Street's fear index, known as the Vix or the CBOE Volatility Index, surged 25 per cent this week to its highest level since February.

Confirming growth fears and a flight from risk to safety assets, the yield on the 10-year US Treasury bond has fallen to an ­unbelievably low 2.33 per cent.The role of the $A

The Australian dollar is finding it has a role to play too, one that plays tidily into the Reserve Bank of Australia and Canberra's hands. And in that respect the change of mood in foreign exchange markets and the flight to US dollar assets is working in the Australian economy's favour.

The Australian dollar has been falling as the US dollar rallies, fetching US87.73¢ on Friday afternoon. It had a US90¢ handle only last month.

This is partly a response to the falling value of commodities, including ­Australia's No 1 export iron ore. Kieran Davies, a Barclays economist based in Sydney, says that Australia has more to worry about than iron ore – coal too poses a concern.

"Where we could get some pressure is coming from coal. In the case of iron ore, most of the big Australian producers have very low costs of production but they're still making money . . . for coal it's more a mixed story, some Australian coalminers would be losing money at current prices."

Marginal coalmines in Queensland may even be shut down, he predicts.

"[The RBA has] been frustrated with the currency. It's taken so long to start to respond to lower commodity prices but I think they've been arguing that the markets underestimated the chance for higher rates in the US so the recovery in the US dollar has taken longer to play out," ­Davies says.

But he does not think the Australian dollar has fallen enough to meet the RBA's definition of fair value. And if anything, fair value in the RBA's eyes may be even lower now in light of the decline in the terms of trade. At least the currency's going in the right direction. If it keeps declining and moves closer to fair value I think they'll be quite pleased."

Hockey is, sensibly, guarded on commenting on interest rates and currencies, after meeting the Fed chair.

He is all too familiar with the trouble former treasurer Peter Costello got into by moving the bond market after blabbing about his conversation with then Fed chairman Alan Greenspan nearly two decades ago. "The Aussie dollar bounces around for rational and irrational reasons," Hockey says. "There are many things that influence the movement in currencies and I'll leave that to the market operators."

Still, the movement in the Australian dollar will be the least of Hockey's economic worries this weekend, even for a half-glass full Treasurer.


Fairfax Media Management Pty Limited

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IMF warns global economy at risk, calls for bold action
8 Hours Ago
Reuters
36


Yuri Gripas | Reuters
The International Monetary Fund (IMF) logo is seen at the IMF headquarters building in Washington.

The International Monetary Fund's member countries on Saturday said bold action was needed to bolster the global economic recovery, and they urged governments to take care not to squelch growth by tightening budgets too drastically.

With Japan's economy floundering, the euro zone at risk of recession and the U.S. recovery too weak to generate a rise in incomes, the IMF's steering committee said focusing on growth was the priority.

"A number of countries face the prospect of low or slowing growth, with unemployment remaining unacceptably high," the International Monetary and Financial Committee said on behalf of the Fund's 188 member countries.

Read MoreLagarde: Global economy weaker than envisaged 6 months ago

The Fund this week cut its 2014 global growth forecast to 3.3 percent from 3.4 percent, the third reduction this year as the prospects for a sustainable recovery from the 2007-2009 global financial crisis have ebbed, despite hefty injections of cash by the world's central banks.

The IMF has flagged Europe's weakness as the top concern, a sentiment echoed by many policymakers, economists and investors gathered in Washington for the Fund's fall meetings, which wrap up on Sunday.

European officials have sought to dispel the gloom, with European Central Bank President Mario Draghi on Saturday talking about a delay, not an end, to the region's recovery.

Read MoreRatings agency S&P cuts France's outlook to negative from stable

But efforts to provide more room for France to meet its European Union deficit target looked set to founder on Germany's insistence that the agreement on fiscal rectitude was set in stone.

The IMF panel urged countries to carry out politically tough reforms to labor markets and social security to free up government money to invest in infrastructure to create jobs and lift growth.

It called on central banks to be careful when communicating changes in policy in order to avoid financial market shocks. While not naming any central banks, the warning appeared aimed at the U.S. Federal Reserve, which will end its quantitative easing policy this month and appears poised to begin raising interest rates around the middle of next year.

The Fed has debated a change to its commitment to holding rates near zero for a "considerable time" at its recent policy meetings, but is stepping gingerly to avoid roiling financial markets. It wants to avoid a repeat of the "taper tantrum" it touched off last year when it signaled its easing of monetary policy was drawing to a close.

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http://www.businesstimes.com.sg/governme...ic-reforms

Tharman stresses urgency of structural economic reforms
By
Nisha Ramchandaninishar@sph.com.sg@Nisha_BT
mrtharmanshan1310.jpg Mr Tharman Shanmugaratnam (above) and International Monetary Fund (IMF) managing director Christine Lagarde were speaking at a press conference on Saturday in Washington, DC after the meeting of the IMFC, the policy-setting body of the IMF. - PHOTO: SPH
13 Oct5:50 AM
Singapore

THE global economy faces the real risk of a prolonged period of sub-par growth, which underlines the need for greater urgency when it comes to implementing structural reforms, said chairman of the International Monetary and Financial Committee (IMFC) Tharman Shanmugaratnam.