World Economy

Rich countries risk ‘permanently weak’ demand: IMF

Advanced economies face "permanently weak demand" warned the International Monetary Fund (IMF) on Tuesday, which argued "the time may be right for an infrastructure push".

According to the organization, infrastructure investment is "one of the few remaining policy levers available to support growth" – especially in the euro zone where despite accommodative monetary policy "there is still substantial economic slack, and inflation remains too low."

"Borrowing costs are low and demand is weak in advanced economies, and there are infrastructure bottlenecks in many emerging market and developing economies," said economists led by Abdul Abiad in the updated version of the IMF's World Economic Outlook, out on Tuesday.

Christine Lagarde
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Boosting infrastructure spending would allow advanced economies to kick-start demand, which is at risk of remaining "persistently weak", said Abiad. It would also raise output in both the short and long-term, especially if the projects are debt-financed, he argued.

Global consultancy McKinsey estimates that $57 trillion of infrastructure investment is needed by 2030 to support economic growth expectations. A big chunk, $23.8 trillion, is from transportation-related projects: roads ($16.6 trillion), rails ($4.5 trillion), seaports ($0.7 trillion) and airports ($2 trillion).

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Also on Tuesday, the IMF said that systemic risks to the global economy had been diminished since 2006 by the significant decrease in global current account imbalances. However, some concerns remained.

"Some of the largest deficits (United States and the stressed euro area economies) and surpluses (China and Japan) have declined. Current account surpluses in core European countries have instead remained large, while current account balances have deteriorated in some emerging markets," said economists led by Marco Terrones.

Since a peak in 2006, global imbalances have narrowed by over one-third, according to the IMF.

But narrower external imbalances have come at the cost of increased internal imbalances, such as high unemployment and large output gaps, said the IMF. This could make countries more vulnerable to changes in market sentiment or to sudden increases in world interest rates.

Terrones advised governments to take policy measures to achieve stronger and more balanced growth. "Deficit economies", the IMF wrote, must address structural issues to advance fiscal consolidation, while surplus economies should take steps to rebalance growth, perhaps by raising public sector investment.

These latest recommendations from the IMF could increase pressure on Germany to use its healthy budget position to bolster public investment, in order to stimulate consumer demand and spur growth—both in its own country and across the euro zone.

The German government provisionally posted a 16.1 billion euros ($20.3 billion) surplus in the first half of 2014, despite faltering growth. Other euro zone countries, particularly France, have called on Germany to do more with its surplus to boost growth in the region.

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