V. Vasiliauskas: Preparations necessary amid strengthening global risks
Global growth continues on a strong footing, yet elevated risks, notably in international trade, are starting to exert downward pressure on the main engines of economic activity – near-term momentum in the US, China and the euro area will be weaker than previously expected. Attending the Annual Meetings of the International Monetary Fund (IMF) and the World Bank Group held in Nusa Dua, Indonesia, this week, Vitas Vasiliauskas, Chairman of the Board of the Bank of Lithuania, will discuss rising downside risks and the need to gear up in order to withstand them.
“Although the global economy is still in the expansion phase, expert analyses indicate that economic outlook is becoming gloomier, especially in terms of international trade,” said Mr Vasiliauskas.
He noted that “it would be unreasonable to expect Lithuania or any other open economy to remain immune to mounting global risks”. It is thus crucial to make the necessary preparations in order to stand ready in face of potential future economic deceleration. According to the governor of the Bank of Lithuania, new challenges call for, first and foremost, responsible fiscal policies and consistent accumulation of financial buffers.
The latest IMF projections are not particularly optimistic: compared with the April forecast, the global growth outlook has been revised downwards for 2018 and 2019 (from 3.9% to 3.7% for both years). There are increasing signs that the major global economies have reached the cyclical peak – growth has been losing momentum and in some cases is anticipated to be weaker than projected in spring.
Lithuania’s strategic markets, such as the euro area (notably Germany), are expected to see slower than anticipated growth in 2018 and 2019. Next year economic expansion should also moderate in the US and China, two of the world’s largest economies (their growth forecasts were marked down by 0.2 percentage point).
One of the main factors behind the slowdown is the rise in protectionism. Intensified trade restrictions and mounting uncertainty are taking a toll on international trade, which is projected to expand by 4.2% this year – 1.0 percentage point slower than in 2017. Other downside risks mainly stem from the global financial system. Amid monetary policy normalisation in the US, the risk of a sudden tightening of international financial conditions is becoming increasingly plausible. This would, arguably, further depress activity in emerging markets, such as Turkey and Argentina.
According to IMF projections, this year economic growth in Lithuania will remain robust at 3.5% (an upward revision of 0.3 percentage point compared with the April projection). In 2019 growth momentum is expected to moderate to 2.9% (0.1 percentage point lower than projected in the first half of 2018).
Given the high degree of economic openness in Lithuania, its economic situation is heavily dependent on global conditions, which means that risks to the world outlook are likely to negatively affect the domestic economy. Hence it is vital to prepare for potential shocks well in advance and accumulate financial buffers that could cushion the effects of an economic slowdown.
The Chairman of the Board of the Bank of Lithuania is a member of the Board of Governors of the IMF. Twice a year he participates in meetings organised by the IMF, where governors of central banks and finance ministers from around the globe discuss relevant economic issues and look for ways to accelerate economic growth. During his visit to Nusa Dua, Mr Vasiliauskas will attend the meetings of the IMF International Monetary and Financial Committee as well as the Nordic-Baltic Constituency. He will also meet with the Governor of the National Bank of Ukraine, representatives of the IMF and commercial bank executives.