US warns of 'increasingly unbalanced' global economy

The US Treasury has stepped up calls for big economies, including the euro area and Japan, to boost demand as it warned the global economy was becoming "increasingly unbalanced".

In a semi-annual report to Congress, the Treasury urged euro area governments and Tokyo not to rely solely on monetary policy to lift growth, while pressing South Korea to reduce interventions in currency markets and let the won rise.

The Treasury said the US recovery remained "intact" even after soft growth during the first quarter of 2015, while describing overseas developments as "disappointing".

US multinationals and exporters have in recent months complained about the impact of the higher dollar on overseas sales, as well as soft demand in other important markets. Minutes from the Federal Reserve's latest policy meeting in March noted that weak activity overseas and the rise in the dollar would "restrain US net exports for some time".

In its report the US Treasury said some countries were putting too much weight on central bank stimulus to boost their economies, and that they should instead use fiscal stimulus and other reforms to lift their performance.

It name-checked Germany, which is running a current account surplus of 7.8 per cent of GDP, as it called on the eurozone to take "all necessary steps" to foster domestic demand.

In the face of disinflation, the European Central Bank had taken "forceful steps", the report said, responding to the inception of quantitative easing by president Mario Draghi earlier this year. However it insisted that the euro area should do more to contribute to global demand by pulling other levers.

The report also flagged up weak demand in Japan as a persistent concern, warning on an overreliance on monetary policy and arguing the government had failed to sufficiently offset the impact of last year's increase in consumption tax.

"Over-reliance on monetary policy and an excessive tightening of fiscal policy will put Japan's recovery and escape from deflation at risk, and could generate negative spillovers," the Treasury said. "As such, Japan's medium-term deficit reduction targets should be sufficiently flexible to respond to weakness in demand growth."

There was also tough language on South Korea, with the Treasury saying it had "intensified its engagement" with the country's government on economic policy. South Korea had substantially increased its interventions in the currency markets in December and January, the report said, in the context of a current account surplus standing at 6.3 per cent of GDP.

"We have made it clear that the Korean authorities should reduce foreign-exchange intervention, limiting it to the exceptional circumstance of disorderly market conditions, and allow the won to appreciate further," the report said.

While in recent years China's exchange rate policies have been a perpetual bugbear in Washington, the Treasury said the country had recently made "real progress" given the appreciation of its real effective exchange rate over the past six months.

The report still cautioned that the renminbi remains "significantly undervalued" and that there was a need for further gains in the future, however. "China's currency needs to appreciate to bring about the necessary internal rebalancing toward household consumption that is a key goal of the government's reform plans and necessary for sustained, balanced global growth."

The Treasury's words came a week ahead of the spring meetings of the World Bank and International Monetary Fund.

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