The world’s long-awaited recovery keeps receding as the International Monetary Fund depressingly revises its global growth forecast downward again.
However, New Zealand’s high exports into Asia and strong dollar should continue to insulate it from the worst effects, one analyst says.
Policy makers, in Washington for the IMF’s semi-annual meetings last weekend, are worried the world’s economy shows no sign of recovery as the Eurozone seems poised to enter its third recession since 2008.
IMF managing director Christine Lagarde painted a gloomy picture of the world’s economy and continues to personally drive for deeper structural reforms.
“The latest snapshot of the global economy looks uneasily familiar: a brittle, uneven recovery, with slower-than-expected growth and increasing downside risks.
“A much higher premium needs to be put across the membership on policies aimed at decisively raising todays actual and tomorrow’s potential growth,” says Ms Lagarde.
The US Federal Reserve is on track to end its third round of money printing at the end of October. Markets are nervous that the closing faucet might cancel out any recent growth.
Economists and politicians are also clamouring for global central banks to maintain or even increase their loose monetary policies to maintain and fuel growth.
But the IMF is now displaying deep concern that the sustained money printing could lead to a wholly new bubble occurring in a system which still hasn’t dealt with its structural debt problems.
Harbour Asset Management director Christian Hawkesby says there’s always a natural tension between the IMF and central banks.
“Effectively the Fed is encouraging people to take on debt to try to revive their economies.
“And due to more positive news out of the United States of a strengthening economy, that becomes the rationale for the Fed and other central banks to start winding back support. The longer they keep that support going, the more they risk fuelling the next big bubble,” says Mr Hawkesby.
Craig Robins, chief executive of Hayes Asset Management, watched the IMF meeting and says its warning is sincere given that the global economy is clearly worse off than the IMF thinks.
“They have genuine concerns about the individual global central bank asset bubbles that are starting to form, and about the huge stimulus programmes and the impact this has had on asset prices.
“Effectively we’re living in a world where every asset is being priced by central banks rather than the free market. If the interest rates are being managed to extreme low levels by central banks rather than free markets, you can see how a lot of distortions can start to develop,” Mr Robins says.
New Zealand exporters should be concerned if they send goods to America, Europe or Japan. But less Federal Reserve money won’t affect New Zealand’s exports if China, India and other creditor countries continue growing.
“New Zealand is actually in a very fortunate position, we’re well placed. Ultimately, we’re producing products that the world wants.” Mr Robins says.
Neither Mr Hawkesby nor Mr Robins deny that the US economy is recovering in a small way. But the recovery is relative to the weakening of other economies and the extraordinary amount of new money in the system.
“The US has got some recovery going on, there’s no doubt about it. But there should have had a massive boom,” Mr Robins says.
The IMF is concerned about the econom, but so far cannot put its finger on what mechanisms it needs to devise to deal with the system’s structural problems.
“It’s a really hard one. It boils down to someone having to take the bad medicine. The central banks have been keeping interest rates low to help economies recover. Whereas what the IMF says is there’s no easy path out of it and we have to cut back on consumption and save more and it’s hard to cushion that.
“The only way is to let the public sector fill the gap. If consumers have to be more cautious, take on less debt and draw back consumption, then the public sector has to spend more and do more of the consumption.” Mr Hawkesby says.
“What the IMF is saying is that we’ve got to sit down together and sort all this out and remove the imbalances,” says Mr Robins.