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  • IMF's LaGarde Issues Another Warning on State of Global Economy

    IMF Managing Director Christine LaGarde is in China today. Speaking at the International Finance Forum , she said the global economy has entered "a dangerous and uncertain phase": Later in the speech, LaGarde addressed China's economy directly. Overall, she gave it good marks. But she warned against complacency and said that all nations need to recognize that they are part of a global economy and that no country is immune from the effects of problems elsewhere, even halfway around the globe: It is on the right path in terms of reducing domestic vulnerabilities—by moderating the pace of credit growth, increasing provisioning and capital, and expanding scope of macroprudential policies. There is still scope for using monetary policy to restrain credit growth. Fiscal policy is appropriately moving back to balance. But if the growth outlook deteriorates significantly, it could become the first line of defense, given ample fiscal space and capacity to deploy resources quickly. China is also on the right path in terms of reorienting the economy towards domestic demand. As Laozi said, “a journey of a thousand miles must begin with a single step”. Indeed, China has already made good progress on the road to rebalancing. The current account surplus has fallen from an all-time high of 10 percent of GDP in 2007 to just over 5 percent last year. While some of this comes from weak global demand, some of it also comes from higher imports—which helps the global economy. Now is the time to move further from exports and investment toward consumption—including by further boosting household incomes and expanding social safety nets. Reform of the financial system continues to be important and, as we have said before, China also needs a stronger currency in real effective terms. Read the full speech here .

  • Martin Baily on Why Ireland's Struggles Matter to US

    Dublin-based RTE reported yesterday that the EU and IMF bailout package for Ireland's ailing economy will total 85 billion euro. Standard and Poor's lowered Ireland's bond rating from AA to A . And now the euro has fallen to two-month low against the dollar. Bad news for Ireland and the Euro-zone. But also bad news for the US, says Brookings Senior Fellow Martin Baily , who sees instability in Europe as a real threat to US recovery: For more of Baily's analysis of the impact of European struggles on US recovery, click here .

  • Asia's Bold Recovery

    China and Asia are flexing their economic muscles as they rebound from the recession with much more vigor than the US and, especially, Europe. Wall Street Journal Economics Editor David Wessel says we need to recognize that Asia is "aiming to pull itself out of the recession by itself," perhaps diminishing the importance of Western consumers in the process: Read more from Wessel on Asia's recovery here .

  • Japan's Triangular Trade Problem

    Over at VoxEU.org , Kyoji Fukao and Tangjun Yuan of Hitotsubashi University in Tokyo have an interesting analysis of Japan's particular economic woes. As they point out, the Global Economic Crisis hit Japan especially hard. Its GDP contracted at a rate nearly twice that of the US in the last quarter of 2008. And yet it did not have a bursting housing bubble or a toxic assets problem on anywhere near the scale as the US and Europe. So why is it struggling, it seems, worse than most? The answer, Fukao and Yuan find, is in Japan's "triangular trade" model. Japan's economic strength is dependent on exports to the West--in large part, the US. But it is also dependent on exports to other Asian countries: Until the economic crisis, there was vigorous “triangular trade”, in which the advanced economies of Asia, such as Japan, South Korea, and Taiwan, exported key components to developing countries, such as China, Thailand, or Vietnam, which assembled and exported the final products to the US (and Europe) in return for US Treasuries. The Asian developing countries specialised in relatively low value-added assembly and manufacturing processes, while the advanced countries concentrated on high-value added processes, such as the production of key components. However, the sudden decrease in US imports has very rapidly contracted this triangular trade. US goods imports fell during the last quarter of 2008 at an annual rate of 19.6%. And as developing countries’ exports to the US decreased, so did their imports from Asia’s advanced economies. Japan, South Korea, and Taiwan thus suffered a significant decline in exports. Of course, Japan is not alone in using this model. China does as well. But while China is taking a bigger hit in terms of net exports, its GDP is not contracting at as fast a rate. Fukao and Yuan: Finally, Figures 4 and 5 compare the impact on gross output and GDP, respectively, for the Asian countries. Reflecting the large decrease in exports, the drop in China’s gross output is 1.7 times as large as Japan’s. However, the difference in the impact on GDP is considerably smaller; the decrease in China’s GDP is only 1.3 times as large as Japan’s. This situation is also the result of triangular trade. China is relatively specialised in the processing and assembly of imported intermediate goods using cheap labour, and the products are then exported to the US. However, the value added ratio of this kind of production is typically low, and it is for this reason that the decrease in GDP is smaller than the decrease in gross output. Read the full post here .