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Global recovery better than expected – IMF

Transcript of a Press Briefing on the International Monetary Fund’s World Economic Outlook

Global recovery has evolved better than we expected. We now forecast global growth to reach 4.2 percent in 2010, which is an upward revision of .3 percent from our January forecast, and to reach 4.3 percent in 2011.

Alongside growth, global trade has also shown a strong rebound, and so have capital flows. As discussed in the newly released Global Financial Stability Report, financial market conditions and stability have improved.

These good global numbers hide, however, a more complex reality; namely, a tepid recovery in many advanced countries and a much stronger one in most emerging and developing economies. Let me discuss each group in turn.

So, when it comes to advanced economies we forecast growth to be 2.3 percent for 2010, and 2.4 percent for 2011, and this is just not enough to make up for the ground lost during the recession. Output for these countries is now 7 percent below its precrisis trend, and this output gap is expected to remain large for many years to come.

Associated with this prolonged output gap is persistent high unemployment. We forecast the unemployment rate in advanced economies to reach 8.4 percent in 2010, and to decline to only 8 percent in 2011.

What is the main factor behind this weak performance and this prolonged output gap? We think it is weak private demand. In the U.S., consumers, who were the drivers of the economy before the crisis, are being more prudent. In Europe, where banks play a central role in the financial intermediation, the weak banking sector limits credit supply. In Japan, deflation has reappeared, leading to higher real interest rates and putting in danger an already weak recovery.

Let me now turn to emerging and developing economies. There, the contrast is fairly striking.

Growth is forecast to be much stronger, 6.3 percent in 2010, 6.4 percent in 2011. Developing Asia is in the lead, with forecasts of 8.7 percent in 2010, 8.6 percent in 2011. And, growth appears not only to be strong, but to be sustainable. While fiscal policy often played a central role in supporting activity in 2009, private demand is strengthening and can sustain growth in the future.

The asymmetric nature of the recovery creates, however, serious challenges, both for advanced and for developing and emerging market economies. Let me talk about those.

In advanced countries the main challenge is one of, obviously, fiscal consolidation. A year ago the risk was that private demand would collapse, leading to another Great Depression scenario, so the priority was to implement fiscal stimulus programs and avoid this catastrophic scenario. This, we did.

Thanks, in part, to the stimulus programs demand did not collapse and has indeed started to grow again, if only weakly. One year later, however, the risk has shifted location. The loss in fiscal revenues associated with the loss in output from the crisis, is threatening to lead, if it is not contained, to a debt explosion. In most countries, fiscal consolidation is increasingly become the priority.

Turning again to emerging and developing countries, they face a different set of challenges. One of them is large capital inflows. Higher growth prospects and higher interest rates are attracting large capital inflows. Such inflows, especially when driven by growth prospects, are fundamentally good news. But, we have learned from experience that they can also lead to booms and busts. Thus, the main policy issue facing recipient countries is how to best accommodate these flows, how much to let the currency appreciate, how to use macroeconomic policy, how to use macroprudential tools, reserves, and capital controls so as to avoid the excesses and maintain stable growth.

Interestingly, and importantly, the solution to the challenges facing advanced and emerging market countries are closely linked. In advanced economies, fiscal consolidation is needed, but is likely to have an adverse effect on demand, and thus on growth. To offset the adverse effects and maintain growth, advanced countries, as a whole, may need to depreciate their currency so as to increase their net exports.

This in turn implies that emerging and developing countries, again as a whole, do the reverse, namely let their currency appreciate and reduce their net exports. It is in their global interest to do so as this adjustment may be needed to sustain growth in advanced countries, and by implication strong growth in the rest of the world.

In many countries, maybe in most countries, it is also clearly in their own direct interest to do so. In China, for example, a shift away from exports toward domestic consumption, a shift that requires both structural measures to decrease saving, and an appreciation of the currency, appears highly desirable on its own.

Let me conclude.

We find ourselves at an important new stage of the crisis. A global depression has been averted, the global economy is recovering and recovering better than we had previously thought likely. This is certainly welcome news.

But, new and no less formidable challenges have presented themselves. Achieving strong, sustained, and balanced growth will not be easy. It will require more work. Namely, fiscal consolidation in advanced countries, exchange rate adjustments, a rebalancing of demand across the world. These are the tasks facing policy makers over the next few years.

Thank you.

via Transcript of a Press Briefing on the International Monetary Fund’s World Economic Outlook by Olivier Blanchard, Economic Counsellor and Director of the Research Department, with Jörg Decressin, Assistant Director, Petya Koeva Brooks, Chief of the World Economic Studies Division, and Abdul Abiad, Senior Economist in the World Economic Studies Division.

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