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Economy Watch
Economy Watch follows the progress of the world economy and offers you our weekly picks. Be sure to visit for the weekly updates.
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January 21 Updates
| IMF: Global recovery may appear stronger, however it is still fragile
The global economy is recovering faster than previously expected, but growth is still dependent in most advanced economies on government stimulus measures and remains fragile, said Dominique Strauss-Kahn, Managing Director of the International Monetary Fund.
Although emerging market economies in Asia were leading the recovery, situation in most advanced economies were still sluggish, with private demand remaining weak and raising joblessness.
“We are not out of the woods until the private sector has recovered,” said, Strauss-Kahn at a news conference in Washington.
Speedy recovery
On the global economy, Strauss-Kahn said that he expected to see countries around the world recovering at different speeds in the various regions. He urged governments not to loosen up stimulus measures too early or assume that a strong recovery had taken hold. He suggested that governments could transfer stimulus measures toward projects that would create additional jobs.
The IMF is scheduled to release its update on the global outlook on January 26.
Summarising the activities in the past two years of crisis and looking ahead to 2010, Strauss-Kahn said that 2010 must be a year of transformation, to complete the reshaping of the global financial and regulatory system.
Here’s a snapshot of his thought and quotes.
• 2008 - a year of humility: “our confidence in markets, institutions, and the status quo turned out to be complacency; we learned how fallible, fragile, and interconnected we are.”
• 2009 - a year of unity: “the world pulled together to respond to a profound economic—and potentially human—calamity, and redeemed the promise of international cooperation.”
• 2010 - a year of transformation—“we must complete the global project to address the failings in regulation, economic policy, and governance that lay behind the crisis.”
He added that regulation and financial sector supervision needed to be not just stronger but smarter. Strauss-Kahn also stressed that the momentum for reforming the financial sector could be lost and policymakers should not forget the roots of the crisis and cited a proposal by U.S. President Barack Obama that major U.S. financial firms pay a fee to help the government recover losses from the financial crisis as an example.
The priorities of IMF
“We will provide ideas in the near future,” said Strauss-Kahn. He highlighted four priorities for the Fund in 2010, and also said that the IMF was looking into proposals on ways to finance climate change measures.
In the coming year, the IMF would focus on delivering the economic regeneration that will drive growth in this new decade. The four priorities comprised:
• A sustainable recovery of output and employment must be the highest priority. The Fund will provide real-time analysis needed to see the project through, guarding against too early, or too late reversal of stimulus measures.
• Continuation of efforts to provide the kind of financing needed to deal with modern crises and to improve its toolkit of financing packages to help member countries to upkeep recovery progress.
• Modernisation of financial sector regulation and establish mechanisms to identify and tackle the hidden risks to country economies. With more focus on systemic, not just country level risks, especially in the financial sector, and financing facilities that provide the kind of insurance needed to avoid excessive and costly reserve accumulation.
• Continuation to improve its governance structure. Fund would meet an end year deadline to deliver a fair redistribution of Fund quotas, and to pursue other governance reforms.
Adjustments in the Fund’s mandate were needed to take account of modern day crises that were far broader than traditional balance of payments crises, to take into account the need to ensure that any financial instability does not spillover into social tensions and become a danger to world peace.
China’s accelerating inflation
China’s inflation rate may quicken up to 8 percent this year thus hurting banking, utility and phone stocks, said BNP Paribas.
Erwin Sanft, head of China and Hong Kong research at BNP Paribas said that as inflation quickens, “Investors want to be involved in anything that benefits. There are only three sectors that don’t benefit, which are banks, telecoms and utilities.”
Last week, China’s central raised the proportion of deposits that banks must set aside as a credit boom threatens to stoke inflation and create asset bubbles. Inflation is likely to step up to more than 5 percent before the middle of the year and may reach 8 percent in the second half, Sanft said.
According to to economists surveyed by Bloomberg, China’s consumer price index will rise 1.4 percent in December, following a 0.6 percent increase in November. The statistics bureau is scheduled to release monthly data at the end of the month.
The nation’s CPI will likely rise 3 to 3.5 percent this year, according to State Council Development Research Center researcher Ba Shusong, the Shanghai Securities News.
The central banks said that China’s foreign-currency reserves rose 23 percent to $2.4 trillion. Banks extended 379.8 billion yuan ($55.6 billion) of new loans in December, the central bank reported, more than the 310 billion yuan median estimate in a Bloomberg News survey. Banks lent an unprecedented 9.59 trillion yuan last year.
The Shanghai Composite Index which rose 80 percent in 2009 has since declined 1.6 percent this year, making China the worst-performing stock market in Asia.
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