Blog Plenty of risks to global economy in 2016

Plenty of risks to global economy in 2016
The global economy struggled through a difficult year in 2015, leaving a range of challenges for policymakers hoping to avoid a third leg of the financial crisis, panelists at the AIC 2016 opening session said.

The Federal Reserve’s moderation in monetary tightening is crucial to sustaining fragile global economic growth in 2016, while structural reforms in China, India and other countries are essential if struggling emerging economies are to regain their footing over the next several years.

“It’s (2016) going to be a period of very uneven and hesitant growth,” said Eswar Prasad, Senior Professor of Trade Policy at Cornell University and Senior Fellow at the Brookings Institution. US growth looks reliable, along with the UK, India and a handful of others. “But by and large, a very morose and gloomy picture across the rest of the world,” Prasad added.

The US economy is improving, but not enough to withstand monetary tightening beyond the Federal Reserve’s quarter-point rate hike last December, according to Gene Sperling, a former director of the US National Economic Council and a former economic aide to Presidents Clinton and Obama.

Fortunately, the Fed under Chair Janet Yellen appears to have put the brakes on interest rate hikes in the near term. Tightening now could damage the US economy, not to mention the global economy. On the other hand, accommodative monetary policy creates little risk, even if it enables inflation to rise above the Fed’s 2 percent long-term target, Sperling said.

Sperling cited the absence of US wage growth and a struggling middle class, even as the labor market has improved. “It’s okay if you overshoot (on inflation) for a little while,” he added.

China could potentially disrupt global economic stability this year, with more than half of AIC attendees naming China’s growth and currency as a major risk. China needs to continue to reform its economy, shuttering “zombie” firms and reducing overcapacity in manufacturing and heavy industry, to sustain GDP growth at its projected 2016 rate of 6.5 percent.

“I think China needs to do more in terms of structural reform in order to solve the medium-term growth question,” said Huang Yiping, Professor of Economics at Peking University, and an advisor to the Monetary Policy Committee for the People’s Bank of China.

Huang added that China is not alone in the need for reform. Most countries around the world have relied heavily on fiscal and monetary stimulus, leaving them vulnerable to ongoing trends toward global free capital flows and flexible exchange rates.

“The problem is, in my view, many emerging market economies are either unable to, or unwilling to, withstand volatile capital flows,” Huang said.

Watch the full replay of the keynote panel discussion featuring: Gene Sperling, Eswar Prasad and Huang Yiping