Terrence J Checki: Observations on the global economy and financial system Remarks by Mr Terrence J Checki, Executive Vice President of the Emerging Markets and International Affairs Group of the Federal Reserve Bank of New York, at the IIF Annual Meeting of Latin America Chief Executives, Santiago, Chile, 6 March 2013. *  *  *  Good afternoon. Thank you, Tim (Adams), for the kind introduction. Let me take this opportunity to congratulate you and wish you well as you take the helm of the IIF (Institute of International Finance). It is a pleasure to be here in Santiago, and to see so many old friends among the distinguished participants. Having spent much of my early career in this part of the world during difficult times, it is gratifying to be reminded first hand of the progress the region has made. That progress is especially evident here in Chile. In my remarks this afternoon, I thought I would offer a few reflections on the current state of the global economy and financial system, and some of the challenges going forward. Let me note, for the record, that my comments this afternoon are personal, and should not be taken as reflecting the views of the Federal Reserve Bank of New York, or the Federal Reserve System. As we all know, the mood in global markets has improved quite a bit since the middle of last year: stocks are up, spreads are down, volatility is lower, and capital market activity has picked up.
This progress is the result of policy improvements that have reduced the imbalances and fragilities that fed past boom-bust cycles; greater openness to international trade and deeper economic and financial integration; and, for commodity exporters, some good fortune in the form of strong prices. Nonetheless, while trend growth in the emerging market economies has substantially outpaced that in the mature economies, the emerging market economies generally continue to accelerate and decelerate in step with the mature economies. So much for decoupling. This continuing close correlation reflects the fact that stronger emerging market growth has been built upon deeper economic and financial integration with the mature economies...as well as with each other. Against that backdrop, spillovers from the mature economies clearly played a part in the recent slowdown across the emerging world. But something more appears to be going on as well. As a general matter, the emerging market economies appear to be operating closer to capacity than the mature economies. Emerging market economy labor markets generally look somewhat tight by historical standards, and while emerging market inflation is down, it is still an issue for a number of countries. This suggests that capacity constraints and structural issues have been playing a role in the recent sluggishness, and that somewhat slower growth may be part of the new normal for the emerging market economies as well. How much slower will in part depend on policy choices in the emerging market economies.