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'Another disappointing year' for global growth: World Bank's Kose

Ayhan Kose

WASHINGTON -- The global economy this year does not appear likely to achieve even the modest improvement predicted in June, Ayhan Kose, director of the World Bank's Development Prospects Group, told The Nikkei.

     Excerpts from the interview follow. 

Q: In June, the World Bank forecast 2.8% growth for the global economy this year, which was a bit lower than January's estimate. It seems that global growth has fallen short of expectations. How do you see current conditions?

A: At that time, we were thinking the global economy was on course to grow around 2.8% in 2015. And then in 2016, we were thinking growth was going to be around 3.3%. But, unfortunately, when we look at the latest activity numbers, we see that the modest improvement we envisioned in June is unlikely to materialize. So, this is going to be another disappointing year in terms of global growth.

Q: Do you think the World Bank needs to lower its estimate?

A: Our next Global Economic Prospects Report will be released in January 2016. The bottom line is that the first quarter was weak and, of course, there are challenges still in advanced economies, and growth is slowing in emerging markets. When you put all of these together, the growth we expected earlier in the year is probably not going to materialize.

Q: How did you view Chinese monetary policy since August and the renminbi's depreciation?

A: The change in their currency regime -- they just changed how the reference rate is determined -- is a step in the right direction. There was some market volatility around the event, but we think that what the authorities did, in terms of letting market forces play a larger role in the determination of the exchange rate, is good news.

Q: Do you also support China's stock market interventions?

A: When you look around the world, when equity markets go through these types of episodes of significant volatility, different authorities respond differently.

     In the case of China, they quickly realized that the markets needed some kind of support to stabilize, and they provided that support. At the same time, the authorities, we  believe, understand that equity markets need to be driven by market forces.

Q: Can China achieve 7% GDP growth this year?

A: Our growth forecast for this year is about 7% in the June Global Economic Prospects report. And we think that China can deliver the growth rate we forecast as it has the necessary policy buffers.

     We need to remember that China has registered very high growth rates for an extended period of time. The authorities have been trying to move to a different growth model. They would like to have more sustainable and balanced growth. That type of growth model requires more support from consumption and less from investment.

     There has been a rebalancing process underway and we see the fruits of that process: investment growth has declined quite a bit. And the economy has been going through a transition from industrial production to services as services growth has outstripped growth in the industrial sector in recent years. And, this has been taking place in an orderly fashion. Our baseline is that China will continue to slow down in an orderly fashion.

Q: Federal Reserve monetary policy is a preoccupation of global financial markets. The outlook is still very unclear.

A: In their last meeting, the Fed policymakers considered, among other factors, the weakness in the global economy and its possibly adverse impact on the US economy, and decided not to increase the policy interest rate.

     There has been excessive focus on the first rate hike, what most people call the "liftoff." This is of course understandable given that the rates have been rock bottom for an extended period of time.  However, we think that it is important to consider not just the liftoff but the subsequent rate increases, and the overall trajectory of the normalization process when we evaluate its impact on the global economy, and especially emerging and developing economies.

     The important point is that interest rates are going to increase sooner or later. For policymakers, especially those in emerging and developing economies, they need to get ready for the normalization of monetary policy, and they need to undertake policies to mitigate the possible adverse effects associated with it.

Q: Would the World Bank support a rate hike at the next FOMC (Federal Open Market Committee) meeting in October?

A:  I'm not sure what you mean by "support." As they always do, they will examine the incoming data and consider the state of the U.S. economy, and how it is affected by the world economy, and then they will make the best decision to meet their dual mandate. And they will do their best in terms of communicating their decisions to markets.

Q: Fed Chair Janet Yellen said recently that the U.S. labor market continues to experience a healthy recovery. On the other hand, inflation and wage pressures are so weak. How do you view the U.S. economy and inflation?

A: Yes, the U.S. labor markets have been quite healthy. The question is how this translates into inflation. Ultimately, the Fed is going to look at labor market dynamics, growth dynamics and inflation dynamics. It will take into account how the state of the world economy affects the U.S. economy as well. The Fed will do its best to time their interest rate decision so it is not "behind" the curve or "ahead" of the curve in terms of the inflation process. This is not an easy task but our baseline is that the Fed has the necessary tools to manage the normalization process smoothly.

Q: Japanese Prime Minister Shinzo Abe recently announced a new "three arrows," one of which aims to raise GDP to 600 trillion yen ($5 trillion). That's about a 30% increase. What's your opinion on the Japanese economy and the Bank of Japan's monetary policy?

A: Let me make just two points. One, in the context of monetary policy, we think that the Bank of Japan is doing what is necessary to reach its inflation target.

     Two, with respect to Abe's latest initiatives: Japan, like other advanced economies, is trying to promote growth. In the case of Japan, the government would like to undertake a comprehensive set of reforms that could accelerate growth. The fact that the authorities are well aware of the challenges and they are eager to implement a comprehensive policy program to promote growth is very good news.

Interviewed by Nikkei staff writer Toshiki Yazawa

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