Global economy in 2011:
Two-speed recovery to extend into 2011 - IMF
Jeremy Clift- IMF Survey online
Two-speed recovery to dominate 2011, with growth remaining slow in
advanced economies
In emerging economies, challenge for some is to manage possible
overheating and capital flows
Number of countries in Europe face tough and long macroeconomic
adjustment
The two-speed global economic recovery is likely to dominate 2011,
with weak growth in advanced economies barely enough to bring down
unemployment and emerging markets facing the challenges of success,
including how to avoid overheating and handle strong capital inflows,
the IMF's Chief Economist, Olivier Blanchard, said.
In an assessment of the global economy at the end of 2010, and the
prospects for 2011, Blanchard said that countries should continue to
focus on rebalancing their economies in the coming year, including
structural measures and exchange rate adjustments.
"Without this economic rebalancing, there will be no healthy
recovery," he told IMF Survey, the online magazine of the International
Monetary Fund (IMF).
In an interview, Blanchard talked about the central role of the Group
of Twenty (G-20) advanced and emerging market economies in helping
during the global crisis and the need for continued cooperation to build
on the recovery, as well as the prospects for both Europe and low-income
countries. Following is the text of the interview:
IMF Survey online: What is your assessment of how the global economy
turned out in 2010? What went better than you anticipated, and what does
not look so good?
Blanchard: The short answer is that there were no major surprises. We
had forecast positive but low growth in advanced economies, fast growth
in emerging economies, and, lo and behold, this is how the year has
turned out.
Indeed, I just went back and compared outcomes to our forecasts as of
last January. For advanced countries, we were right on the dot for the
United States. Things turned out a bit better than expected for core
Europe, Japan had higher growth than we had anticipated, but it looks
like a one-time phenomenon. As for emerging countries, we were right on
the mark for China; India did better than we had forecast.
To say that there were no major surprises, however, is not the same
as saying that things are fine. They are not. The two-speed recovery,
low in advanced countries, fast in emerging market countries, is
striking and its features are increasingly stark. They will probably
dominate 2011, and beyond.
IMF Survey online: What do you mean? Tell us more about this
two-speed recovery.
Blanchard: Emerging market countries were affected by the crisis
through both trade and financial channels. The turnaround in trade has
been nearly as sharp as the earlier collapse. But while trade has not
yet fully recovered, most emerging market countries have been able to
increase domestic demand so as to return to high growth. In turn, their
good performance has led capital flows to come back, in some cases, with
much force. For many of these countries, the challenges are now how to
avoid overheating and how to handle capital flows.
"The turnaround in trade has been nearly as sharp as the earlier
collapse."
In many advanced economies, the crisis damage was much deeper. The
financial system was badly broken. Securitization has to be reinvented.
In many of these countries, markets are still uncertain about the true
health of banks and financial intermediation is not working well.
Combine this with the need to correct past excesses, from low saving to
excess housing investment and the result is a slow recovery, barely
strong enough to decrease unemployment. This is painful but not that
surprising. The evidence, which we had documented in a chapter of the
World Economic Outlook last year, is that recoveries from financial
crises are long and slow.
IMF Survey online: For the past couple of years, the need for
economic rebalancing has been the mantra of the IMF. As we begin 2011,
where do we stand?
Blanchard: It should remain the mantra. Rebalancing, internal and
external, continues to be crucial. Without this economic rebalancing,
there will be no healthy recovery. The argument is very simple: Before
the crisis, growth in many advanced countries came from excessive
domestic demand, be it consumption, or housing investment. This could
not go on. Those countries must rely on other sources of demand. Until
now, they have used fiscal policy to prop up domestic demand. This was
needed, but it is not sustainable. The deficit countries must rely more
on external demand, on exports. And, by symmetry, surplus countries,
many of them emerging markets, must do the reverse, shift from external
demand to domestic demand and reduce their dependence on exports.
This is not to say that without rebalancing, the recovery cannot
continue. Continued fiscal expansion, or a return by U.S. consumers to
their old, low-saving ways can sustain demand and growth for some time.
But they will recreate many of the problems that were at the root of the
crisis. And guess what will come next...
IMF Survey online: What about exchange rate adjustments? Some argue
that there is too much pressure on China to allow its currency, the
yuan, to appreciate.
Blanchard: Rebalancing is a complex process. No single measure, no
one country holds the solution on its own. Structural measures are
required: for example, in Asia, measures to improve financial
intermediation or provide more social insurance, in the United States,
reforms of the financial intermediation system. But exchange rate
adjustment is an integral part of the process.
IMF Survey online: Aren't capital inflows to emerging market
countries a growing worry?
Blanchard: If well used, these capital flows can help rather than
hurt. By leading to an appreciation, they help shift countries away from
external demand toward domestic demand. And, by making it easier and
cheaper to borrow, they can boost domestic demand.
This being said, some emerging market countries rightly worry that
capital flows will come and go. They worry about their ability to
intermediate the high flows and in some cases they worry about the risks
of over-appreciation as well as overheating. So far, we have not seen
the tsunami of flows that is sometimes described in the press. But,
agreeing on broad "rules of the road" that take into account both
country circumstances as well as global links will be one of the major
challenges in the year to come.
IMF Survey online: What about low-income countries? What are their
prospects?
Blanchard: Because of their more limited financial integration with
the world economy, low-income countries were mostly affected by the
crisis through the trade channel. As trade has largely recovered, and as
strong growth in emerging market countries has pushed up commodity
prices, many of them are doing well. Sub-Saharan Africa, for example,
grew at more than five percent in 2010, and we forecast roughly the same
for next year. Their performance, however, is not only due to exports.
Previous sound policies allowed many to use fiscal measures to support
their economies. And private domestic demand typically has also been
quite strong.
IMF Survey online: Let us turn to Europe. What's the outlook there,
particularly for some of the countries on what is termed the periphery
Europe?
Blanchard: There is no question that a number of countries in Europe
face a tough and long macroeconomic adjustment. In most cases, they
would have had to do so whether or not the global crisis had taken
place. The global crisis only makes it tougher.
"For those countries in the euro and thus operating under a fixed
exchange rate, this is going to be a long and tough slog."
They had, based on what turned out to be unduly optimistic
expectations, increased domestic demand excessively, and some had run
very large current account deficits. Like others, but more so than
others, they must shift from domestic demand to external demand. For
those countries in the euro and thus operating under a fixed exchange
rate, this is going to be a long and tough slog.
Stronger growth in core Europe, if it comes, will strengthen their
exports and help the adjustment. But, based on past experience, a full
return to health will likely take a long time. Social programs are
essential, both for their own sake and to maintain broad political
support.
IMF Survey online: What about fiscal and banking problems?
Blanchard: Except for Greece, the fiscal woes are the result of the
macro slump, not of irresponsible fiscal behaviour. Can the countries
achieve fiscal sustainability? They can, but another IMF fiscal mantra
should be repeated here: What is essential is not so much dramatic cuts
now but medium-term anchoring, a credible path to debt stabilization,
and eventually debt reduction.
Can they do it on their own? I fully understand the reluctance of
countries to ask for a joint program from the European Union and the
IMF. But such programs can help, in two ways: First, by putting a
ceiling on the interest rate at which governments can borrow, the
programs eliminate the risk of multiple equilibria - that is the risk
that investors, right or wrong, ask for high interest rates, making it
impossible for the countries to repay, and making the investors' fears
self fulfilling. Second, even if the programs do not ask for more than
the country intended to do on its own, they reinforce the credibility of
these commitments, and reassure markets about the medium run.
In addition to fiscal worries are the current fears about the banking
system. I suspect these are overstated. But, the only way to decrease
those fears is increased transparency, and, for this, the sooner the
better. In practice, this means new, more credible stress tests,
together with clearer rules about burden sharing: How much of the losses
will be absorbed by creditors, by national governments, by the EU. There
is a lot of loose talk about bailouts. My belief is that the bailout
component, either by national governments, or the European Union, can be
quite limited. But we shall only know that once the homework has been
done.
IMF Survey online: You have talked about rebalancing, and what
countries have to do. What can we expect from the G-20, and in
particular from the G-20 mutual assessment process, the so-called MAP?
Blanchard: There is no question that the Group of Twenty has played a
central role in the crisis. So long as the crisis was acute, it provided
just the right forum for strong and fast action. Now that the crisis is
less acute, and countries increasingly face different problems,
agreement is clearly harder to achieve, and, as we saw in the buildup to
Seoul, discussions can be intense.
But discussions take place as part of the G-20 process, both in
public view and behind the scenes. And here, the G-20 MAP process, in
which the Fund acts as an expert consultant to the G-20, can play a
central role. It can give national policymakers a sense of the world
economy landscape, show the implications of current policies, show the
dangers of an unbalanced recovery, explore alternative policies, and
make for a much more informed dialogue. This does not guarantee success.
But it surely improves the odds.
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