Global Recovery Has Started, Says IMF

Source : The Business Times, August 20, 2009

(WASHINGTON) The global economy is beginning to recover from the worst recession since World War II, one that has left 'deep scars' likely to affect consumers and businesses for years, said Olivier Blanchard, the chief economist of the International Monetary Fund (IMF).

Mr Blanchard: Notes that the crisis has left deep scars which will affect supply and demand for years to come

'The recovery has started,' Mr Blanchard said in a paper that the Washington-based lender released on Tuesday. 'The crisis has left deep scars, which will affect both supply and demand for many years to come.'

He said that the financial crisis had made Americans more conscious of 'tail risks' - events that are unlikely to occur but when they do, have devastating consequences.

That means that US consumers are unlikely to return to their free-spending ways, and both the US and its trading partners will have to adjust. Emerging Asian countries, especially China, must play a big role.

'From the point of view of the United States, a decrease in China's current account surplus would help increase demand and sustain the US recovery,' he said. 'That would result in more US imports which would help sustain world recovery.'

But in order for China to boost domestic demand, it will need to provide a stronger social safety net and increase household access to credit, which will encourage its consumers to save less and spend more.

'Both higher Chinese import demand and a higher (yuan) will increase US net exports,' he said.

The IMF, which has rescued economies from Pakistan to Iceland in the past year, is advising officials around the world to keep economic stimulus programmes in place no longer than necessary to chart a path to sustainable growth.

In his paper, Mr Blanchard says that the process requires a 'delicate rebalancing act'. Capital flows to emerging markets 'may not fully come back in the next few years,' he said. While most economies may expand for the next few quarters, 'growth will not be quite strong enough to reduce unemployment, which is not expected to crest until some time next year,' he said.

Mr Blanchard cautioned that rising government debt levels, particularly in advanced economies, mean that fiscal stimulus programmes cannot continue for 'very long' unless private consumption and investment replace public support for growth.

'All this means that we may not go back to the old growth path, that potential output may be lower than it was before the crisis,' he said in the paper. 'Sustaining the nascent recovery is likely to require delicate rebalancing acts, both within and across countries.'

A sustained global recovery may hinge on the ability of nations in Asia to boost domestic demand to levels that help US exports, he said.

'The United States was not only at the origin of the crisis, it is central to any world recovery,' he said.

An inability or unwillingness by China, Japan and other Asian economic powers to reduce their current account surpluses may lead to a slower US recovery and political pressure to pump in more fiscal stimulus and borrow more, eventually raising questions about US inability to trim debt.

'Fiscal deficits might be maintained for too long, leading to issues of debt sustainability, worries about US government bonds and the dollar, and causing large capital flows from the United States,' Mr Blanchard said. 'Dollar depreciation may take place, but in a disorderly fashion, leading to another episode of instability and high uncertainty, which could itself derail the recovery.'

In the short term, most countries will see positive economic growth for the next few quarters, Mr Blanchard said, although it will be probably too tepid to reduce unemployment, which is not expected to crest until some time next year. -- Bloomberg, Reuters