© IMF Staff Photo/Stephen Jaffe

Bundesbank President Jens Weidmann believes the mounting pessimism over the economy these days is overblown. Speaking as the Annual Meeting of the International Monetary Fund (IMF) in Lima drew to a close, Mr Weidmann commented: "The economic skies aren't as gloomy as many an observer makes them out to be." He chose instead to emphasise that the economy was picking up at least in most of the advanced economies, singling out the United States but also mentioning the euro area.

But there was also no doubt that the downside risks to economic activity had increased of late, Mr Weidmann told an audience of journalists in the Peruvian capital city.

Commodity price boom over

To underline this point, the Bundesbank President particularly noted the slowdown in emerging market growth and the adverse implications this would involve. However, growth rates in these countries have been on the wane for some time now, and that also reflected a "rebalancing among emerging market economies towards a more sustainable growth path," Mr Weidmann stated in a clear reference to China.

Discussing what was behind the slowdown in growth that had particularly affected the oil-exporting countries, he pointed to the end of the commodity price boom and the need for these countries to now "adjust their fiscal and economic policies accordingly".

In a remark that was also addressed to the euro area, the Bundesbank President indicated that production capacities there "might well have been overestimated somewhat" in recent months.

Explaining the rationale behind his remarks, Mr Weidmann told his audience that the problem right now was not a lack of demand so much as a combination of factors that were dampening growth potential. That was why he welcomed the recommendation at the IMF's Annual Meeting for every country to work harder on growth-promoting reforms.

Monetary policy: not a silver bullet for structural problems

Mr Weidmann went on to stress that monetary policy was powerless to tackle structural problems. Noting that while the current highly accommodative monetary policy stance was the appropriate post-crisis response for many countries – and for the euro area – Mr Weidmann cautioned that it was anything but a silver bullet. The fact that many such countries with a very loose monetary policy were nonetheless showing little more than sluggish growth rates spoke for itself, he said.

He also warned of the risks and side-effects involved in an ultra-loose monetary policy. "The persistent low interest rates may well have shored up demand in the euro area, but they have also driven up the financial markets' appetite for risk," he cautioned. Mr Weidmann also saw clear evidence that enterprises in the emerging market economies had taken advantage of the favourable funding conditions worldwide in recent years to ramp up their leveraging.  That also made the emerging market economies vulnerable to a reversal of capital flows – something that might occur, say, if the US Federal Reserve were to return to more normal monetary policy conditions.

Ultimately, though, "there is no reason to postpone a normalisation of monetary policy if the fundamentals are right," the Bundesbank President stated. After all, he noted, a move to reverse policy rates, for instance in the United States, would be a response to an improvement in activity. "And at the end of the day, that would be good news for the global economy," Mr Weidmann concluded.