IMF Scrutinizes US Economy Instead of Going After China
International Monetary Fund and World Bank spring meetings took place in Washington this week. While the US hoped to focus attention on China’s industrial policies, the Biden administration found itself and its policies coming under scrutiny.
As the US delegation looked to the annual springtime gathering of finance chiefs in Washington this week, they hoped to use the confab to put pressure on China to steer clear of dumping exports on world markets.
Treasury Secretary Janet Yellen and colleagues were also ready to claim credit for the US having come to the world economy’s aid with growth policies that have lifted the whole global outlook.
Things didn’t go quite as Washington hoped. Indeed, US officials found themselves at the bottom of a gang tackle. A dramatic shift in rhetoric from Federal Reserve Chair Jerome Powell on Tuesday effectively rewrote the script for the International Monetary Fund-World Bank spring meetings. As IMF Managing Director Kristalina Georgieva put it Thursday, “All eyes are on the US.” And many aren’t looking upon it too kindly.
Signaling that the Fed will need to hold off on lowering interest rates for a while longer, Powell’s remarks roiled financial markets and created headaches for other policymakers round the world. That invited a new narrative: that Team Biden is running the economy too hot, with troubling ramifications for many other countries.
Georgieva did credit the US for being a key reason why the fund boosted its forecast for global growth this year. But the IMF boss also warned that the American expansion has left its economy “slightly overheated.”
Both she and her No. 2, Gita Gopinath, called out the US budget deficit for being too high, at what they described was 7% of gross domestic product. The Congressional Budget Office measured it at 6.2% of GDP last year—still more than twice the European guideline of a maximum 3%.
“Very strong expansionary” fiscal policy with a rapidly rising debt-to-GDP ratio and surging debt-servicing costs has contributed to US economic strength, European Commission Vice President Valdis Dombrovskis said. “Obviously all this will warrant discussion in the US on the direction of fiscal policy and whether some more prudence is needed.”
Germany’s finance minister, Christian Lindner, said “I don’t want to be impolite,” but effectively pinpointed President Joe Biden’s Inflation Reduction Act as doing the opposite of what its name claims.
Lindner warned his own nation against adopting such an IRA type industrial program to subsidize the renewable energy and electric vehicle industries, saying Wednesday that, in the case of the US, “the inflation rate is higher again and this forces the Fed to react.”
“The subsidy race is a race to the bottom, and we shouldn’t go in that direction,” European Central Bank President Christine Lagarde said.
South African central bank Governor Lesetja Kganyago and Brazilian Finance Minister Fernando Haddad stuck with simple observations that the higher-for-longer US interest-rate stance—a consequence of disappointingly high inflation readings this year—has implications across global markets.
Two of America’s top allies, Japan and South Korea, took their issues with the exchange-rate effects of US policy directly to Yellen. The US Treasury chief signed off on a joint statement “acknowledging serious concerns” in Tokyo and Seoul about recent sharp exchange-rate depreciation against the dollar.
US trade policy also came in for criticism. Bank of England policymaker Catherine Mann said that moves toward “onshoring” and “friend-shoring” supply chains mean a more volatile global economic environment.
From left, Japanese Finance Minister Shunichi Suzuki, US Treasury Secretary Janet Yellen and South Korean Finance Minister Choi Sang-mok in Washington this week.Photographer: Julia Nikhinson/Bloomberg
Yellen has championed the friend-shoring approach, to shift manufacturing away from China and towards US allies and partners including India and Vietnam.
Mann, a former Citigroup Inc. chief global economist, said the cost of this reshaping of supply chains is underappreciated. “The magnitude of what is being given up is quite large,” she said Friday. “There will be more shocks, greater inflation volatility—central banks will have to be always on alert to this upward bias to inflation.”
As for China, the US Treasury did have a chance to put concerns about overcapacity and over-reliance on supply-side stimulus and exports to Chinese officials directly.
That message seems not to have landed, though. Back in Guangzhou, in southern China, Premier Li Qiang this week attended the annual Canton trade fair. Among his key talking points? Calling Chinese exporters to enhance their value-added and the global appeal of their brands.
