World Economic Outlook:
Global recovery gaining strength despite new risks - IMF
* Global growth forecast at around 4 1/2
percent for both 2011 and 2012
* High unemployment and commodities prices
pose major social concerns
* More progress urgently required on fiscal
and financial repair and reform
* Work needed to re-balance global demand,
address imbalances
The global economic recovery is gaining strength, with world growth
projected at about 4 1/2 percent in both 2011 and 2012, but unemployment
remains high, and risks of overheating are building in emerging market
economies, the IMF said in its latest forecast.
High commodity prices present new policy challenges, while old
challenges fiscal and financial repair and reform and the re-balancing
of global demand remain work in progress.
Given the improvement in financial markets, buoyant activity in many
emerging and developing economies, and growing confidence in advanced
economies, economic prospects for 2011/12 are good," the IMF said in its
April 2011 World Economic Outlook (WEO). However, disruptions to oil
supply pose new risks to the recovery.
"Fears have turned to commodity prices," IMF Chief Economist Oliver
Blanchard said. Commodity prices have increased more than expected,
reflecting a combination of strong demand growth and a number of supply
shocks.
These increases conjure the specter of 1970s-style stagflation, but
they appear unlikely to derail the recovery," he told a press conference
in Washington.
Financial conditions fragile
Real GDP in advanced economies and emerging and developing economies
is expected to expand by about 2 1/2 percent and 6 1/2 percent,
respectively (see table below).
In the report released on April 11, it said financial conditions
continue to improve after the global crisis, although they remain
unusually fragile. In many emerging market economies, demand is robust
and overheating is a growing policy concern. Developing economies,
particularly in sub-Saharan Africa, have also resumed fast and
sustainable growth. But the IMF said new risks have emerged:
Rising food and commodity prices pose a threat to poor households,
adding to social and economic tensions, notably in the Middle East and
North Africa.
Oil prices have shot up because of unrest in the Middle East.
The WEO said disruptions so far would have only mild effects on
economic activity but, given falling spare oil production capacity,
risks are on the downside. The IMF said that the earthquake and tsunami
in Japan had exacted a terrible human toll but that its global
macroeconomic impact would be limited.
Many old challenges unaddressed
The IMF said many old policy challenges remain unaddressed even as
new ones arise. In advanced economies, weak sovereign balance sheets and
still-moribund real estate markets continue to present major concerns,
especially in certain euro area economies.
Strengthening the recovery in advanced economies will require keeping
interest rates low as long as wage pressures are subdued, inflation
expectations are well anchored, and bank credit is sluggish.
At the same time, public spending needs to be placed on a sustainable
medium-term path by implementing fiscal consolidation plans and
entitlement reforms, supported by stronger fiscal rules and
institutions.
The WEO said this is particularly urgent in the United States to stem
the risk of globally destabilizing changes in bond markets. To make a
sizable dent in the projected medium-term deficits, broader measures
such as Social Security and tax reforms will be essential. It said that
in Japan, the immediate budgetary priority was to support
reconstruction. Once reconstruction efforts are under way and the size
of the damage is better understood, attention should turn to linking
reconstruction spending to a clear fiscal strategy for bringing down the
public debt ratio over the medium term.
In the euro area, despite significant progress, markets remain
apprehensive about the prospects of countries under market pressure.
For them what is needed at the euro area level is sufficient,
low-cost, and flexible funding to support strong fiscal adjustment, bank
restructuring, and reforms to promote competitiveness and growth. More
generally, greater trust needs to be re-established in euro area banks
through ambitious stress tests and restructuring and recapitalization
programs.
Overheating concerns
The challenge for many emerging and some developing economies is to
ensure that present boom-like conditions do not develop into overheating
over the coming year.
Inflation pressure is likely to build further as growing production
comes up against capacity constraints, with large food and energy price
increases raising pressure for higher wages.
Real interest rates are still low and fiscal policies appreciably
more accommodative than before the crisis.
Appropriate action differs across economies, depending on their
cyclical and external conditions.
However, a tightening of macroeconomic policies is needed in many
emerging markets.
Many emerging and developing economies will need to provide
well-targeted support for poor households that struggle with high food
prices, the IMF said. Over the medium term, greater progress in
advancing global demand re-balancing is essential to put the recovery on
a stronger footing. This will require action by many countries, notably
fiscal adjustment in key economies with external deficits, and greater
exchange rate flexibility and structural reforms that eliminate
distortions and boost savings in key surplus economies.
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