Rebalancing Essential to World Recovery, Says IMF

With the world still trying to bounce back from the global economic crisis, the International Monetary Fund says in its latest World Economic Outlook that the recovery remains fragile and uneven.


“The world economic recovery is proceeding,” IMF Chief Economist Olivier Blanchard told a press conference. “But it is an unbalanced recovery, sluggish in advanced countries, much stronger in emerging and developing countries. The question is whether a more balanced recovery can be achieved. The answer is yes, but it requires two complex global rebalancing acts.”


Blanchard explains that countries with huge trade and budget deficits such as the United States will need to boost exports. And countries with big trade surpluses such as China must reduce their dependency on exports and boost domestic demand.


Blanchard says the main drivers of the recovery were inventory accumulation and fiscal stimulus. The first one is coming to a natural end and the second one is being slowly phased out. In most advanced countries, however, consumption and parts of investment are still weak and will remain so for some time. By contrast, in most emerging and developing economies, consumption investment is strong and, therefore, sustaining growth.


"What has to happen is that consumption and investment must now take the lead," says Blanchard.


IMF forecasts global activity to expand by 4.8% in 2010 and 4.2% in 2011. In advanced economies, growth is projected at 2.7% in 2010 and 2.2% in 2011, with some economies slowing noticeably during the second half of 2010 and the first half of 2011. As a result, economic slack will remain substantial and unemployment persistently high for some time.


Prospects are better for emerging and developing economies, which are projected to expand at rates of 7.1% and 6.4% for 2010 and 2011. Inflation is projected to stay generally low, amid continued excess capacity and high unemployment, with a few exceptions among the emerging economies.


The IMF has warned that the financial sector remains the Achilles’ heel of the recovery. The global crisis was rooted primarily in the financial sector and the failure of policymakers to grasp the depth and breadth of ways in which financial shocks could be amplified across financial institutions and economies.