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Recovery may run out of steam, says IMF

Larry Elliot

Recovery from the worst recession since the 1930s is weak, unbalanced and runs the risk of running out of steam the International Monetary Fund warns.

Recovery from the worst recession since the 1930s is weak, unbalanced and runs the risk of running out of steam, the International Monetary Fund (IMF) warned this week.

In its half-yearly health check, the Washington-based fund said the global economy remained fragile and stressed that high unemployment posed the risk of social upheaval.

The IMF’s World Economic Outlook (WEO) reported that central banks would need to keep interest rates at rock-bottom levels and consider further injections of money through quantitative easing should the recent slackening in the pace of growth continue.

It expressed concern about the $4-trillion “wall” of maturing debt that banks would face over the next two years and said governments might need to delay plans to repair the damage caused to their public finances by the recession.

And, in a clear criticism of China, it said the stronger emerging economies needed to do more to help Western countries with big trade deficits to boost their exports.
The IMF expects global activity to expand 4,8% in 2010 and 4,2% in 2011, similar to its last forecasts three months ago. It said, however, that there were considerable downside risks to its predictions.

A reacceleration of growth
Advanced economies would slow down in the second half of this year and the first half of 2011, followed by a reacceleration of growth. “Slack will remain substantial and unemployment persistently high.”

The fund has also cut the growth projections of many countries. The United States, the world’s biggest economy, is now expected to grow 2,6% this year and 2,3% in 2011, 0,7 points and 0,6% lower respectively than envisaged in July. China and India will be the fastest-growing emerging economies in 2010 and 2011, according to the fund. Output will slow slightly in both countries from 10,5% to 9,6% in China and from 9,7% to 8,4% in India.

Olivier Blanchard, the IMF’s economic counsellor, said in a foreword to the WEO that achieving the “strong, balanced and sustained world recovery” envisaged by the G20 in Pittsburgh last year was never going to be easy. “It requires much more than just going back to business as usual. It requires two fundamental, difficult economic rebalancing acts.”

Blanchard said there had to be internal rebalancing within economies, with private demand taking over from public spending as the engine of growth. There also had to be external rebalancing so that countries like the US could export into big emerging economies like China. “These two rebalancing acts are taking place too slowly.”
He pointed out that private domestic demand remained weak in the developed world, reflecting both the excesses of the bubble years and the scars left by the crisis: “Housing booms have given way to housing slumps. Weaknesses in the financial system are still constraining credit.”

Big current account surpluses
Many emerging economies continued to run big current account surpluses, piling up reserves rather than allowing their currencies to appreciate, a move that would help exporters in the West.

“The result is a recovery that is neither strong enough nor balanced and runs the risk of not being sustained.”

Blanchard said the IMF’s solution was the continuation of ultra-low interest rates, financial reform and repair, a commitment by countries to put their public finances in order, and a willingness by emerging economies to act in the world’s interest as well as their own by boosting domestic consumption.

“All these pieces are interconnected. Unless advanced economies can count on stronger private demand, both domestic and foreign, they will find it difficult to achieve fiscal consolidation. And worries about sovereign risk can easily derail growth. If growth stops in advanced countries, emerging market economies will have a hard time decoupling.

“The need for careful design at the national level and coordination at the global level may be even more important today than at the peak of the crisis a year and a half ago.”

Large adjustments
The WEO said most advanced economies and a few emerging economies still faced large adjustments: “Their recoveries are proceeding at a sluggish pace and high unemployment poses major social challenges.

“The global recovery remains fragile, because strong policies to foster internal rebalancing of demand from public to private sources and external rebalancing from deficit to surplus economies are not yet in place.

“With policy rates already near zero in the large advanced economies, monetary policymakers may have to resort to further unconventional measures if private demand weakens unexpectedly as fiscal support wanes.

“Fiscal adjustment needs to start in 2011. If global growth threatens to slow appreciably more than expected, countries with fiscal room could postpone some of the planned consolidation.” —

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