These are the biggest risks to the global economy

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 Credit Suisse 2016 Asian Investment Conference (AIC) 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. U.S. growth looks reliable, along with the U.K., 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 U.S. 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 U.S. 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 U.S. 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 per cent long-term target, Sperling said. Sperling cited the absence of U.S. wage growth and a struggling middle class, even as the labour market has improved. “It’s ok 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 per cent.

“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.

The Financialist is a digital magazine presented by Credit Suisse that looks at the trends and ideas that drive markets, businesses and economies.

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