China has been told that its weak consumer spending is holding back world growth.
International Monetary Fund Managing Director Kristalina Georgieva bemoaned the slow pace of the worldwide recovery on Thursday, saying that Europe needed to do more to boost productivity and China should work to unleash its dormant domestic demand.
Georgieva told a news conference during the IMF and World Bank spring meetings in Washington that a number of factors are converging to hold back growth in Europe and China, from ageing populations to sub-optimal allocations of capital, while the US has far outperformed expectations.
“This is what preoccupies us these days. How can we better stem the slowdown of productivity and growth, and what we can do to reverse it?” Georgieva said.
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Georgieva said China, where domestic demand is suffering because of a property crisis brought on by over-investment, was at a “fork in the road” and should pivot away from its decades-old investment and export-led growth model to one led by consumer spending.
“The time has come to look at domestic sources for growth,” she said of China.
This starts with resolving the property sector crisis to give consumers more confidence to spend, and expanding the social safety net, which would give Chinese people the “opportunity to save a bit less and spend a bit more,” the IMF chief said.
US Treasury Secretary Janet Yellen on a recent trip to China made similar arguments that Beijing should work to boost domestic consumption, while warning that the US would not accept Chinese efforts to flood global markets with exports of electric vehicles and solar products as a way to revive growth.
The IMF on Tuesday forecast global growth at 3.2% for 2024 – well below its 20-year pre-pandemic average of 3.8% – citing lacklustre performances in Europe and China and the impact of high interest rates and regional wars on developing economies.
And asset managers are bracing for delays in rate cuts as the US Federal Reserve struggles with persistently high inflation.
The IMF boosted its US growth forecast by 0.6 percentage point to an above-potential 2.7% for 2024, while cutting the forecast for the euro zone by 0.1 percentage point to 0.8%.
Fiscal Restraint Call
Georgieva said the US has done a better job of harnessing technology innovation and turning it into scalable business activity. The US also has benefited from domestic energy production that has kept energy prices low and immigration that has created an ample supply of labour without too much wage inflation.
Technology has not brought similar gains to Europe, she said.
“We know that in Europe, there is still work to be done to unleash the power of innovation. Just comparing the cost of a patent in the US and the European Union tells you a story,” Georgieva said, referring to higher EU costs and regulations.
More also can be done to raise investments in human capital to create more dynamic labour markets and better allocation of capital, she said.
Georgieva also called for more fiscal restraint among IMF member countries because fiscal capacity has been exhausted in most countries by the Covid-19 pandemic and the subsequent cost- of-living crisis, with heavy debt burdens more difficult to carry in a high interest rate environment.
This message was echoed by the IMF’s Fiscal Monitor on Wednesday, which said the US and other major economies were spending too much during election years.
“In a world where crisis keeps coming, countries must urgently build fiscal resilience to be prepared for the next shock,” Georgieva said.
- Reuters with additional editing by Sean O’Meara
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