Statement by Governor Boštjan Vasle during his attendance at the IMF and World Bank annual meeting

The Governor of the Bank of Slovenia attended the annual meetings of the IMF and the World Bank in Washington DC. The key discussions centred around the renewed reductions in the IMF’s global economic growth forecasts, and the key factors in these reductions. Similar to the ECB, the IMF is emphasising that raising inflation in the euro zone demands other policy actions, not just monetary policy.

At its annual meeting the IMF reduced its global economic growth forecast for this year to 3%. Mr Vasle warned: “Like other international institutions, in its latest forecasts the IMF has reduced its expectations of economic growth, while highlighting that there are significant risks of an even sharper slowdown in growth.”

While three-quarters of the world’s countries were enjoying rising economic growth just two years ago, we are now facing a synchronised slowdown in the global economy, with fully 90% of the global economy seeing lower economic growth this year. The key reasons for the slowdown in economic growth are the deterioration in trade relations, the uncertainties connected with Brexit, and the slower growth in China.

This slowdown in global economic growth in a period of looser monetary policy is evident in advanced economies (e.g. the US and the euro area) and in developing economies (e.g. China). The IMF finds that had central banks failed to act preventively in response to the deterioration in the global macroeconomic situation, and had the ECB failed to respond to low inflation in the euro area, global economic growth would be 0.5 percentage points lower that it otherwise is.

Mr Vasle said: “Just as the governors of euro area central banks did in September, the IMF stressed that the current macroeconomic situation demands a broad macroeconomic policy response, and not just monetary policy actions.” Measures of a structural nature are required, in particular a fiscal policy response. The IMF is calling on euro area countries with the fiscal manoeuvring room to loosen fiscal policy and to stimulate economic growth through public investment, while countries with limited fiscal capacity need gradual fiscal consolidation and reforms that target the labour market and raise growth potential. The latter also applies to the countries of central and eastern Europe.

One of the issues raised repeatedly at this year’s meeting was the side effects of the monetary policy measures introduced by central banks in recent years. Current economic developments, particularly the expectation of persistently low economic growth and inflation, point to a longer period of low interest rates, high liquidity, and lax financing conditions. The behaviour of the financial markets during a longer period of such conditions being in place could reduce the financial stability of individual countries, and thus the entire euro area. Overvaluation in the global venture capital market could lead to a sudden deterioration in financing conditions and a worsening macroeconomic situation, particularly in financially vulnerable countries.

The IMF is also warning of the increased vulnerability of insurance corporations and pension funds caused by low returns, which depend on interest rate levels. Institutional investors have therefore become more aggressive. The excessive increase in investment in the debt of firms with weak debt servicing capacity is a cause for particular concern.

Above all, the long persistence of these conditions is affecting the banking system and the banks’ business models. Under these conditions banks are expanding their activities into higher-risk areas, thereby increasing their risk exposure, while the risks are also increasing for the participants in these transactions. Mr Vasle emphasised: “Behaviour of this type has been seen in Slovenia in recent years, mainly in certain segments of bank lending. To prevent any deterioration in financial stability, we have tightened the Bank of Slovenia’s macroprudential measure relating to consumer lending.”