Remarks by Min Zhu, IMF Deputy Managing Director
The new challenges – Global economic slowdown..
Let me begin with the global economic outlook. Overall, we expect global growth to slow to 4 percent this year and next.But this global number masks some important differences. In the advanced economies—the epicenter of the financial crisis—the recovery is still weak and bumpy, with unacceptably high unemployment. They will only manage an anemic 1½ to 2 percent in 2011-12.
The global economy has entered a dangerous new phase. While the recovery continues, it looks weaker, bumpier, and more uneven. Financial stress has risen substantially. The world is suffering from a collective crisis of confidence, which is holding back consumption, investment, and job creation. This imposes not only economic, but also social costs. And uncertainty has been exacerbated by policy indecision and political dysfunction across the advanced economies.
A key problem is too much debt in the system. Uncertainty hovers over sovereigns across the advanced economies, banks in Europe, and households in the United States. Adverse feedback loops between the real economy and the financial sector are gaining strength. Concerns about public debt sustainability in the euro area have intensified, leading to fears about the health of the area’s banks.
The story is different in the emerging markets and developing countries, with growth projected in the 6 to 6½ percent range. The two-speed recovery that we noted last year is still very much in evidence. If anything, it is getting starker. While the advanced economies face cold headwinds, the emerging markets and developing countries face too much heat.
This is a real bright spot, as countries harvest the fruits of sound economic policies. And while accommodative policies, especially fiscal stimulus, helped to ease the pain of the crisis, we now see signs of overheating and inflationary pressures in some countries.
But these countries are not immune to adverse developments in the core economies.
I see a number of key risks here. First, continued financial market stress could lead to large and abrupt capital outflows as investors flee to safety. Second, weaker global growth would hurt emerging markets through reduced trade flows and lower commodity prices. And third, a global slowdown could expose underlying vulnerabilities from excessive credit growth—vulnerabilities that typically stay below the surface in good times.
So downside risks are substantial. Without policy action to halt this vicious circle, the global economy could face a protracted period or low growth and high unemployment. Even worse, we cannot rule out a downward spiral of uncertainty and risk aversion, dysfunctional financial markets, unsustainable debt dynamics, and a collapse in global demand.
These countries must stand ready to deal with spillovers from the advanced economies. IMF research shows that economic tremors in core countries can easily reverberate across the globe, especially when channeled by the financial sector.
Resolving the crisis requires two key rebalancing acts—a domestic demand switch from the public to the private sector, and a global demand switch from external deficit to external surplus counties. Progress on both fronts has been weak. Private demand has not been strong enough to take the baton from public demand. And domestic demand in key emerging markets has not grown enough, owing to structural distortions and limited exchange rate flexibility.
Policies have gone halfway toward addressing the debt problems in advanced economies and achieving more domestic and inclusive growth in emerging and developing economies. It is time to finish the job. Policymakers must act now, act boldly, and act together. The stakes are high.
The first priority is to deal with balance sheets—sovereigns, banks, and households. On sovereigns, advanced countries need fiscal consolidation as a matter of priority, but, for some, pushing too fast will harm growth and jobs. Credible measures that deliver and anchor savings in the medium term will help create space for supporting growth and jobs in the short run.
Policymakers must also focus squarely on job creation. High unemployment not only depresses demand, but also leads to grave human and social costs. This is especially true when unemployment is long-lasting, and concentrated among the young and the unskilled.
In the emerging markets, including in Asia, the surplus countries must rely more on domestic demand, especially since domestic-led growth is also more inclusive growth. In the deficit countries, including in Latin America, the challenge is to reduce overheating and preserve financial stability.
While the advanced economies have the greatest responsibility to act, all must play their part. In this interconnected world, there can be no decoupling. The ultimate goal is growth—inclusive growth that benefits everybody, and growth that produces sufficient jobs.
African regional outlook
The encouraging recent developments we have been observing in sub-Saharan Africa make a welcome contrast to the disappointing recent performance of the advanced economies. For sub-Saharan Africa, we project output growth this year 5¼ percent, rising to 5¾ percent by 2012.
Beneath these good overall prospects for sub-Saharan Africa, there is however considerable diversity.
• Most low-income countries have been doing well, despite the weak world economy: one third of them are expected to grow by more than 6 percent this year. However, poor households have been hit hard by rising food and fuel prices, and famine is devastating the Horn of Africa.
• Economic developments have been less positive for some middle-income countries. South Africa, in particular, was hit hard by the global crisis. With unemployment remaining stubbornly high, growth will probably be limited to about 3½ percent this year.
• Oil exporters have been enjoying high oil prices, and the non-oil sectors in their economies are projected to grow by 7½ percent this year.
Despite the rebound, the crisis did a lot of damage. The strong momentum in reducing poverty and reaching the Millennium Development Goals has been stymied. South Africa alone lost a million jobs. And now, the resilience of Africa is being tested again by sharp increases in food and fuel prices and the fallouts of the sovereign debt crisis in Europe, spilling over to the European banking system. There are also downside risks to the outlook, including volatility in financial and commodity markets, as well as signs that inflation may be on the rise again.
Looking ahead, the policy challenge in Africa will become trickier, because of what is happening in advanced economies.
If growth continues to falter in the North, the South will eventually be adversely affected. This could happen through the same transmission channels as in the previous crisis, namely lower trade, lower foreign investment, lower remittances, and lower aid flows. In the event of an increased impact from the global slowdown, and subject to financing constraints, policies should focus on maintaining planned priority spending. However, some slower growing, mostly middle-income countries, including South Africa, have yet to see output and employment return to potential levels. Policies there should remain supportive of output progression; and even more so if global growth wanes.
Most low-income countries are currently growing at an increased pace, but their policy reaction has been too slow to shed the accommodative approach adopted during the previous crisis. As a result, inflation is now rising in a number of them. These countries should tighten monetary policy and focus on medium-term objectives in setting fiscal policy. With the projected output growth and rising inflation, it is time to rebuild the buffers that served the region so well during the previous crisis. And since many African countries need to invest in infrastructure and strengthen social safety nets, domestic revenue mobilization must be a priority.
Oil-exporting countries are in a different league. Better terms of trade are providing an opportunity to build up reserves depleted in the aftermath of the previous crisis to cushion price volatility and global slowdown, while at the same time pursuing development goals.
Trade re-orientation and regional integration
Trade re-orientation and regional integration can help increase resilience to the global downturn.
Developing countries now account for about half of sub-Saharan Africa’s exports and almost 60 percent of sub-Saharan Africa’s imports. This re-orientation is mostly driven by the economies of Brazil, China, and India, but also by a substantial increase in trade within sub-Saharan Africa. A similar re-orientation is also taking place in investment flows, with China now accounting for 16 percent of total foreign direct investment to the region; other emerging countries are also making considerable investments in sub-Saharan Africa.
This re-orientation and the associated expansion of trade and financial flows have benefits, including gains from comparative advantage, economies of scale, technology transfers, and the diversification of export markets. As a result, closer engagement with other developing countries, including within sub-Saharan Africa, fosters higher valued-added and employment.
However, Africans do not need to go far to find new opportunities. There are significant untapped resources for expanding trade and financial flows within sub-Saharan Africa itself. Regional integration could raise the economies of scale in the region, thus increasing industrialization, competitiveness, and attractiveness for foreign direct investment.
Against this background, it is encouraging that regional integration initiatives are gaining momentum. A tri-partite agreement among the East Africa Community, the Common Market for Eastern and Southern Africa, and the Southern Africa Development Community on launching negotiations on a free-trade zone was signed recently. This prospective free-trade zone could cover 26 countries with a population of 600 million and a GDP of about US$1 trillion. A lot remains to be done, however, to make this vision a reality. The IMF supports regional integration and harmonization initiatives through policy advice and technical assistance, drawing on its vast international experience. AFRITAC South, which we inaugurated today, will also contribute to these efforts.
The evolving role of the IMF
I believe the IMF has a strong partnership with Africa. We are certainly focused on the distinct challenges of the region. But in our interconnected world, global issues are also African issues. Strengthening our ability to prevent crises matters for everybody. Let me talk a little about the IMF’s agenda.
We are trying to better understand the interconnections that run through the global economy. We are focused more than ever on the vulnerabilities and spillovers that run through our interconnected world. Clearly, this is important for Africa’s economy too, given its dependence on what happens in advanced economies.
We are also trying to improve global monitoring of capital flows. This is becoming an important issue here in Africa, with the growth of frontier markets—like Mauritius—which are finding favor with international investors. These flows bring many benefits to recipient countries, but they also come with risks to macroeconomic and financial stability.
The IMF is seeking to sharpen its awareness of the quality of growth within countries. A poor distribution of income and high unemployment can have implications for macroeconomic stability, sustainable growth, and social stability, as demonstrated by the Arab Spring.
We need to broaden the range of indictors we look at to assess the economic health of a country. But this is not really our area of expertise, so we must collaborate with other institutions. Right now, we are working with the International Labor Organization (ILO) across a number of dimensions, including on the policies behind job-creating growth. Zambia is one of our pilot cases of enhanced social partnership discussions involving the IMF, the ILO, and the International Trade Unions Confederation. We are also working with the ILO in building effective social protection floors in low-income countries—Mozambique is a pilot in this respect.
I think our lending during the crisis drew a line in the sand, helping the countries themselves and reducing contagion—including to African countries. We also changed the way we lend, making our lending programs more flexible, streamlining conditionality, stressing country ownership, and protecting social spending.
Concessional lending to low-income countries jumped sharply during the crisis, and the Fund seeks to increase its concessional lending capacity to provide up to $17 billion during 2009-14. We also cancelled all interest payments through the end of 2011, with permanently higher concessionality thereafter.
We introduced different lending facilities to reflect the diverse needs of our membership better. We adopted a more flexible approach to debt, giving countries with lower debt vulnerabilities and greater capacity to manage public resources enhanced leeway to borrow more from both concessional and non-concessional sources.
Our lending programs allowed governments maintain critical spending. A recent IMF study shows that health and education spending in countries with IMF programs increases faster than in developing countries as a whole.
During the crisis, we also took steps to enhance liquidity provision in times of extreme volatility. We created insurance-like instruments intended for crisis prevention. Looking ahead, we are discussing ways to provide short-term liquidity during times of systemic stress to stop contagion. In this, we think about collaborating with other institutions, such as central banks, systemic risk boards, and regional financing arrangements.
Capacity building is a core part of the IMF’s work. After all, sound policies must be built on sound foundations. Strong institutions are critical for sound macroeconomic management, and ultimately for economic development and inclusive growth.
It is technical assistance and capacity building that brings me to Mauritius today. Just a few hours ago, I had the privilege of opening our latest IMF regional technical assistance center—known as AFRITAC South. This represents an important milestone. This new center is our fourth in Africa, and the total number of countries covered by AFRITACs has reached 38. And we are not finished, as we are planning on one more center in West Africa.
I believe the AFRITAC model is a recipe for success, because of three key advantages. First, it is built on country ownership. Second, the proximity to the action greatly enhances the chances of success. And third, the model provides ample opportunities for cross-fertilization, knowledge transfer, and exchange of best practices.
It is now part of conventional wisdom that cooperation saved the world from calamity during the last crisis. Today, collaboration is more important than ever, given the grave and urgent challenges, as well as the complexity and interdependence of the global economy. And everybody must have a voice at that table, including Africa.
As a multilateral institution founded to support cooperation, the IMF is here to help its members. We all share the same goal—a stronger, more resilient, and more inclusive global economy. Let’s continue to work together during these uncertain economic times.
Airbus CEO urges trade war ceasefire, easing of COVID travel bans
By Tim Hepher
PARIS (Reuters) – The head of European planemaker Airbus called on Saturday for a “ceasefire” in a transatlantic trade war over aircraft subsidies, saying tit-for-tat tariffs on planes and other goods had aggravated damage from the COVID-19 crisis.
Washington progressively imposed import duties of 15% on Airbus jets from 2019 after a prolonged dispute at the World Trade Organization, and the EU responded with matching tariffs on Boeing jets a year later. Wine, whisky and other goods are also affected.
“This dispute, which is now an old dispute, has put us in a lose-lose situation,” Airbus Chief Executive Guillaume Faury said in a radio interview.
“We have ended up in a situation where wisdom would normally dictate that we have a ceasefire and resolve this conflict,” he told France Inter.
Boeing was not immediately available for comment.
Brazil, which has waged separate battles with Canada over subsidies for smaller regional jets, on Thursday dropped its own complaint against Ottawa and called for a global peace deal between producing nations on support for aerospace.
Faury said the dispute with Boeing was particularly damaging during the COVID-19 pandemic, which has badly hit air travel and led to travel restrictions or border closures. He expressed particular concern about widening bans within Europe.
“We are extremely frustrated by the barriers that restrict personal movement and it is almost impossible today to travel in Europe by plane, even domestically,” he said.
“The priority no. 1 for countries in general is to reopen frontiers and allow people to travel on the basis of tests and then eventually vaccinations.”
The comments come as businesses increase pressure on governments to reopen economies as coronavirus vaccine roll-outs gather pace across Europe.
France has defended recently introduced border restrictions, saying they will help the government avoid a new lockdown and stay in force until at least the end of February.
Germany installed border controls with the Czech Republic and Austria last Sunday, drawing protest from Austria and concerns about supply-chain disruptions.
Berlin calls the move a temporary measure of last resort.
Poland said on Saturday it had not ruled out imposing restrictions at the country’s borders with Slovakia and the Czech Republic due to rising COVID-19 cases.
(Reporting by Tim Hepher; Editing by Kirsten Donovan)
Why a predictable cold snap crippled the Texas power grid
By Tim McLaughlin and Stephanie Kelly
(Reuters) – As Texans cranked up their heaters early Monday to combat plunging temperatures, a record surge of electricity demand set off a disastrous chain reaction in the state’s power grid.
Wind turbines in the state’s northern Panhandle locked up. Natural gas plants shut down when frozen pipes and components shut off fuel flow. A South Texas nuclear reactor went dark after a five-foot section of uninsulated pipe seized up. Power outages quickly spread statewide – leaving millions shivering in their homes for days, with deadly consequences.
It could have been far worse: Before dawn on Monday, the state’s grid operator was “seconds and minutes” away from an uncontrolled blackout for its 26 million customers, its CEO has said. Such a collapse occurs when operators lose the ability to manage the crisis through rolling blackouts; in such cases, it can take weeks or months to fully restore power to customers.
Monday was one of the state’s coldest days in more than a century – but the unprecedented power crisis was hardly unpredictable after Texas had experienced a similar, though less severe, disruption during a 2011 cold snap. Still, Texas power producers failed to adequately winter-proof their systems. And the state’s grid operator underestimated its need for reserve power capacity before the crisis, then moved too slowly to tell utilities to institute rolling blackouts to protect against a grid meltdown, energy analysts, traders and economists said.
Early signs of trouble came long before the forced outages. Two days earlier, for example, the grid suddenly lost 539 megawatts (MW) of power, or enough electricity for nearly 108,000 homes, according to operational messages disclosed by the state’s primary grid operator, the Electric Reliability Council of Texas (ERCOT).
The crisis stemmed from a unique confluence of weaknesses in the state’s power system.
Texas is the only state in the continental United States with an independent and isolated grid. That allows the state to avoid federal regulation – but also severely limits its ability to draw emergency power from other grids. ERCOT also operates the only major U.S. grid that does not have a capacity market – a system that provides payments to operators to be on standby to supply power during severe weather events.
After more than 3 million ERCOT customers lost power in a February 2011 freeze, federal regulators recommended that ERCOT prepare for winter with the same urgency as it does the peak summer season. They also said that, while ERCOT’s reserve power capacity looked good on paper, it did not take into account that many generation units could get knocked offline by freezing weather.
“There were prior severe cold weather events in the Southwest in 1983, 1989, 2003, 2006, 2008, and 2010,” Federal Energy Regulatory Commission and North American Electric Reliability Corp staff summarized after investigating the state’s 2011 rolling blackouts. “Extensive generator failures overwhelmed ERCOT’s reserves, which eventually dropped below the level of safe operation.”
ERCOT spokeswoman Leslie Sopko did not comment in detail about the causes of the power crisis but said the grid’s leadership plans to re-evaluate the assumptions that go into its forecasts.
The freeze was easy to see coming, said Jay Apt, co-director of the Carnegie Mellon Electricity Industry Center.
“When I read that this was a black-swan event, I just have to wonder whether the folks who are saying that have been in this business long enough that they forgot everything, or just came into it,” Apt said. “People need to recognize that this sort of weather is pretty common.”
This week’s cold snap left 4.5 million ERCOT customers without power. More than 14.5 million Texans endured a related water-supply crisis as pipes froze and burst. About 65,000 customers remained without power as of Saturday afternoon, even as temperatures started to rise, according to website PowerOutage.US.
State health officials have linked more than two dozen deaths to the power crisis. Some died from hypothermia or possible carbon monoxide poisoning caused by portable generators running in basements and garages without enough ventilation. Officials say they suspect the death count will rise as more bodies are discovered.
THIN POWER RESERVE
In the central Texas city of Austin, the state capital, the minimum February temperature usually falls between 42 and 48 degrees Fahrenheit (5 to 9 degrees Celsius). This past week, temperatures fell as low as 6 degrees Fahrenheit (-14 degrees Celsius).
In November, ERCOT assured that the grid was prepared to handle such a dire scenario.
“We studied a range of potential risks under both normal and extreme conditions, and believe there is sufficient generation to adequately serve our customers,” said ERCOT’s manager of resource adequacy, Pete Warnken, in a report that month.
Warnken could not be reached for comment on Saturday.
Under normal winter conditions, ERCOT forecast it would have about 16,200 MW of power reserves. But under extreme conditions, it predicted a reserve cushion of only about 1,350 MW. That assumed only 23,500 MW of generation outages. During the peak of this week’s crisis, more than 30,000 MW was forced off the grid.
Other U.S. grid operators maintain a capacity market to supply extra power in extreme conditions – paying operators on an ongoing basis, whether they produce power or not. Capacity market auctions determine, three years in advance, the price that power generators receive in exchange for being on emergency standby.
Instead, ERCOT relies on a wholesale electricity market, where free market pricing provides incentives for generators to provide daily power and to make investments to ensure reliability in peak periods, according to economists. The system relied on the theory that power plants should make high profits when energy demand and prices soar – providing them ample money to make investments in, for example, winterization. The Texas legislature restructured the state’s electric market in 1999.
Since 2010, ERCOT’s reserve margin – the buffer between generation capacity versus forecasted demand – has dropped to about 10% from about 20%. This has put pressure on generators during demand spikes, making the grid less flexible, according to North American Electric Reliability Corporation (NERC), a nonprofit regulator.
That thin margin for error set off alarms early Monday morning among energy traders and analysts as they watched a sudden drop in the electrical frequency of the Texas grid. One analyst compared it to watching the pulse of a hospital patient drop to life-threatening levels.
Too much of a drop is catastrophic because it would trigger automatic relay switches to disconnect power sources from the grid, setting off uncontrolled blackouts statewide. Dan Jones, an energy analyst at Monterey LLC, watched from his home office in Delaware as the grid’s frequency dropped quickly toward the point that would trigger the automatic shutdowns.
“If you’re not in control, and you are letting the equipment do it, that’s just chaos,” Jones said.
By Sunday afternoon about 3:15 p.m. (CST), ERCOT’s control room signaled it had run out of options to boost electric generation to match the soaring demand. Operators issued a warning that there was “no market solution” for the projected shortage, according to control room messages published by ERCOT on its website.
Adam Sinn, president of Houston-based energy trading firm Aspire Commodities, said ERCOT waited far too long to start telling utilities to cut customers’ power to guard against a grid meltdown. The problems, he said, were readily apparent several days before Monday.
“ERCOT was letting the system get weaker and weaker and weaker,” Sinn said in an interview. “I was thinking: Holy shit, what is this grid operator doing? He has to cut load.”
Sinn said he started texting his friends on Sunday night, warning them to expect widespread outages.
‘SECONDS AND MINUTES’
Early Monday morning, one of the largest sources of electricity in the state – the unit 1 reactor at the South Texas Nuclear Generating Station – stopped producing power after the small section of pipe froze in temperatures that averaged 17 degrees Fahrenheit (9 degrees Celsius). The grid lost access to 1,350 MW of nuclear power – enough to power about 270,000 homes – after automatic sensors detected the frozen pipe and protectively shut down the reactor, said Victor Dricks, a spokesman for the U.S. Nuclear Regulatory Commission.
About 2:30 a.m. (CST), the South Plains Electric Cooperative in Lubbock said it received a phone call from ERCOT to cut power to its customers. Inside the ERCOT control room, staff members scrambled to call utilities and cooperatives statewide to tell them to do the same, according to operational messages disclosed by the grid operator.
Three days later, ERCOT Chief Executive Bill Magness acknowledged that the grid operator had only narrowly avoided the calamity of uncontrolled blackouts.
“If we hadn’t taken action,” he said on Thursday, “it was seconds and minutes (away), given the amount of generation that was coming off the system at the same time that the demand was still going up.”
(Reporting by Tim McLaughlin and Stephanie Kelly; additional reporting by Nichola Groom; editing by Simon Webb and Brian Thevenot)
UK could declare Brexit ‘water wars’ – The Telegraph
(Reuters) – Britain could restrict imports of European mineral water and several food products under retaliatory measures being considered by ministers over Brussels’ refusal to end its blockade on British shellfish, the Telegraph reported.
Senior government sources pointed to potential restrictions on the importing of mineral water and seed potatoes, the report said.
(Reporting by Maria Ponnezhath in Bengaluru; Editing by Daniel Wallis)
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