Two-speed recovery extended into 2011

Two-speed recovery Extend into 2011, Says IMF
By Jeremy Clift
IMF Survey online


December 30, 2010

Two-speed recovery to dominate 2011, with growth remaining slow in advanced economies
In emerging economies, challenge for some is to manage possible overheating and capital flows
Number of countries in Europe face tough and long macroeconomic adjustment
The two-speed global economic recovery is likely to dominate 2011, with weak growth in advanced economies barely enough to bring down unemployment and emerging markets facing the challenges of success, including how to avoid overheating and handle strong capital inflows, the IMF’s Chief Economist, Olivier Blanchard, said.

In an assessment of the global economy at the end of 2010, and the prospects for 2011, Blanchard said that countries should continue to focus on rebalancing their economies in the coming year, including structural measures and exchange rate adjustments.

“Without this economic rebalancing, there will be no healthy recovery,” he told IMF Survey, the online magazine of the International Monetary Fund (IMF).

In an interview, Blanchard talked about the central role of the Group of Twenty (G-20) advanced and emerging market economies in helping during the global crisis and the need for continued cooperation to build on the recovery, as well as the prospects for both Europe and low-income countries. Following is the text of the interview:

IMF Survey online: What is your assessment of how the global economy turned out in 2010? What went better than you anticipated, and what does not look so good?

Blanchard: The short answer is that there were no major surprises. We had forecast positive but low growth in advanced economies, fast growth in emerging economies, and, lo and behold, this is how the year has turned out.

Indeed, I just went back and compared outcomes to our forecasts as of last January. For advanced countries, we were right on the dot for the United States; things turned out a bit better than expected for core Europe; Japan had higher growth than we had anticipated, but it looks like a one-time phenomenon. As for emerging countries, we were right on the mark for China; India did better than we had forecast.

To say that there were no major surprises, however, is not the same as saying that things are fine. They are not. The two-speed recovery, low in advanced countries, fast in emerging market countries, is striking and its features are increasingly stark. They will probably dominate 2011, and beyond.

IMF Survey online: What do you mean? Tell us more about this two-speed recovery.

Blanchard: Emerging market countries were affected by the crisis through both trade and financial channels. The turnaround in trade has been nearly as sharp as the earlier collapse. But while trade has not yet fully recovered, most emerging market countries have been able to increase domestic demand so as to return to high growth. In turn, their good performance has led capital flows to come back, in some cases, with much force. For many of these countries, the challenges are now how to avoid overheating and how to handle capital flows.

"The turnaround in trade has been nearly as sharp as the earlier collapse."
In many advanced economies, the crisis damage was much deeper. The financial system was badly broken. Securitization has to be reinvented. In many of these countries, markets are still uncertain about the true health of banks and financial intermediation is not working well. Combine this with the need to correct past excesses, from low saving to excess housing investment and the result is a slow recovery, barely strong enough to decrease unemployment. This is painful but not that surprising. The evidence, which we had documented in a chapter of the World Economic Outlook last year, is that recoveries from financial crises are long and slow.

IMF Survey online: For the past couple of years, the need for economic rebalancing has been the mantra of the IMF. As we begin 2011, where do we stand?

Blanchard: It should remain the mantra. Rebalancing, internal and external, continues to be crucial. Without this economic rebalancing, there will be no healthy recovery. The argument is very simple: Before the crisis, growth in many advanced countries came from excessive domestic demand, be it consumption, or housing investment. This could not go on. Those countries must rely on other sources of demand. Until now, they have used fiscal policy to prop up domestic demand. This was needed, but it is not sustainable. The deficit countries must rely more on external demand, on exports. And, by symmetry, surplus countries, many of them emerging markets, must do the reverse, shift from external demand to domestic demand and reduce their dependence on exports.

This is not to say that without rebalancing, the recovery cannot continue. Continued fiscal expansion, or a return by U.S. consumers to their old, low-saving ways can sustain demand and growth for some time. But they will recreate many of the problems that were at the root of the crisis. And guess what will come next …

IMF Survey online: What about exchange rate adjustments? Some argue that there is too much pressure on China to allow its currency, the yuan, to appreciate.

Blanchard: Rebalancing is a complex process. No single measure, no one country holds the solution on its own. Structural measures are required: for example, in Asia, measures to improve financial intermediation or provide more social insurance, in the United States, reforms of the financial intermediation system. But exchange rate adjustment is an integral part of the process.

IMF Survey online: Aren’t capital inflows to emerging market countries a growing worry?

Blanchard: If well used, these capital flows can help rather than hurt. By leading to an appreciation, they help shift countries away from external demand toward domestic demand. And, by making it easier and cheaper to borrow, they can boost domestic demand.

Blanchard: “Rebalancing, internal and external, continues to be crucial. Without this economic rebalancing, there will be no healthy recovery” (IMF photo)
This being said, some emerging market countries rightly worry that capital flows will come and go. They worry about their ability to intermediate the high flows and in some cases they worry about the risks of over-appreciation as well as overheating. So far, we have not seen the tsunami of flows that is sometimes described in the press. But, agreeing on broad “rules of the road” that take into account both country circumstances as well as global links will be one of the major challenges in the year to come.

IMF Survey online: What about low-income countries? What are their prospects?

Blanchard: Because of their more limited financial integration with the world economy, low-income countries were mostly affected by the crisis through the trade channel. As trade has largely recovered, and as strong growth in emerging market countries has pushed up commodity prices, many of them are doing well. Sub-Saharan Africa, for example, grew at more than 5 percent in 2010, and we forecast roughly the same for next year. Their performance, however, is not only due to exports. Previous sound policies allowed many to use fiscal measures to support their economies. And private domestic demand typically has also been quite strong.

IMF Survey online: Let us turn to Europe. What’s the outlook there, particularly for some of the countries on what is termed the periphery Europe?

Blanchard: There is no question that a number of countries in Europe face a tough and long macroeconomic adjustment. In most cases, they would have had to do so whether or not the global crisis had taken place. The global crisis only makes it tougher.

"For those countries in the euro and thus operating under a fixed exchange rate, this is going to be a long and tough slog."
They had, based on what turned out to be unduly optimistic expectations, increased domestic demand excessively, and some had run very large current account deficits. Like others, but more so than others, they must shift from domestic demand to external demand. For those countries in the euro and thus operating under a fixed exchange rate, this is going to be a long and tough slog.

Stronger growth in core Europe, if it comes, will strengthen their exports and help the adjustment. But, based on past experience, a full return to health will likely take a long time. Social programs are essential, both for their own sake and to maintain broad political support.

IMF Survey online: What about fiscal and banking problems?

Blanchard: Except for Greece, the fiscal woes are the result of the macro slump, not of irresponsible fiscal behavior. Can the countries achieve fiscal sustainability? They can, but another IMF fiscal mantra should be repeated here: What is essential is not so much dramatic cuts now but medium-term anchoring, a credible path to debt stabilization, and eventually debt reduction.

Can they do it on their own? I fully understand the reluctance of countries to ask for a joint program from the European Union and the IMF. But such programs can help, in two ways: First, by putting a ceiling on the interest rate at which governments can borrow, the programs eliminate the risk of multiple equilibria—that is the risk that investors, right or wrong, ask for high interest rates, making it impossible for the countries to repay, and making the investors’ fears self fulfilling. Second, even if the programs do not ask for more than the country intended to do on its own, they reinforce the credibility of these commitments, and reassure markets about the medium run.

In addition to fiscal worries are the current fears about the banking system. I suspect these are overstated. But, the only way to decrease those fears is increased transparency, and, for this, the sooner the better. In practice, this means new, more credible stress tests, together with clearer rules about burden sharing: How much of the losses will be absorbed by creditors, by national governments, by the EU. There is a lot of loose talk about bailouts. My belief is that the bailout component, either by national governments, or the European Union, can be quite limited. But we shall only know that once the homework has been done.

IMF Survey online: You have talked about rebalancing, and what countries have to do. What can we expect from the G-20, and in particular from the G-20 mutual assessment process, the so-called MAP?

Blanchard: There is no question that the Group of Twenty has played a central role in the crisis. So long as the crisis was acute, it provided just the right forum for strong and fast action. Now that the crisis is less acute, and countries increasingly face different problems, agreement is clearly harder to achieve, and, as we saw in the buildup to Seoul, discussions can be intense.

But discussions take place as part of the G-20 process, both in public view and behind the scenes. And here, the G-20 MAP process, in which the Fund acts as an expert consultant to the G-20, can play a central role. It can give national policymakers a sense of the world economy landscape, show the implications of current policies, show the dangers of an unbalanced recovery, explore alternative policies, and make for a much more informed dialogue. This does not guarantee success. But it surely improves the odds.


http://www.imf.org/external/pubs/ft/survey/so/2010/NEW123010A.htm

U.S. Downturn Dragging World Into Recession

U.S. Downturn Dragging World Into Recession
Report Says Global Economy Will Shrink for First Time Since 1940s

By Anthony Faiola
Washington Post Staff Writer
Monday, March 9, 2009

Source: http://www.washingtonpost.com/wp-dyn/content/article/2009/03/08/AR2009030801216.html

The World Bank also cautioned that the cost of helping poorer nations in crisis would exceed the current financial resources of multilateral lenders. Such aid could prove critical to political stability as concerns mount over unrest in poorer nations, particularly in Eastern Europe, generated by their sharp reversal of fortunes as private investment evaporates and global trade collapses.

In its report, released ahead of a major summit of finance ministers in London this week, the World Bank called on developed nations struggling with their own economic routs to dedicate 0.7 percent of the money they spend on stimulus programs toward a new Vulnerability Fund to help developing countries.

The report predicted that the global economy will shrink this year for the first time since the 1940s, reducing earlier estimates that emerging markets would propel the world to positive growth even as the United States, Europe and Japan tanked. The dire prediction underscored what many are calling a mounting crisis within a crisis, as the downturn that started in the wealthy nations of the West washes over developing countries through a pullback in investment, trade and credit. Despite the United States' position as the epicenter of the crisis, investors are flocking to U.S. Treasury bills and the dollar, squeezing developing nations out of global credit markets.

"We need to react in real time to a growing crisis that is hurting people in developing countries," World Bank President Robert B. Zoellick said in a statement. Action is needed by governments and multilateral lenders "to avoid social and political unrest," he said.
The report said that 94 out of 116 developing countries have been hit by economic slowdowns. The World Bank projected that the economic crisis will push around 46 million people into poverty in 2009 through job and wage cuts, as well as declining flows of remittances, the money that foreign workers send to their families. Net private capital flows to emerging markets are plunging, set to fall to $165 billion this year -- or 17 percent of their 2007 levels. Falling demand in the West is sparking the sharpest drop in world trade in 80 years, sending sales of the products and commodities of poorer nations spiraling down, the report said.

That decline is touching off a wave of job losses. Cambodia has lost 30,000 jobs in the garment industry. In India, more than half a million jobs vanished in the last three months of 2008, including cuts in the gem, jewelry, auto and textile industries, according to the World Bank.

As a result, the report estimates that at least 98 countries may have problems financing at least $268 billion in public and private debt this year. It noted a worsening in market conditions could raise that figure as high as $700 billion. Additionally, only one quarter of vulnerable developing countries, the World Bank said, have the ability to launch their own stimulus programs or to independently finance measures such as job-creation or safety-net programs.

To help them, multilateral lenders will need to dig deep. The World Bank remains well financed and is positioned to almost triple spending to $35 billion this year. But it warned the scope of the need in the developing world will exceed the combined ability of major multilateral lenders, and it called on governments in major nations and the private sector to pitch in more.

For instance, its sister organization, the International Monetary Fund, recently received $100 billion more from Japan but is still asking more affluent nations to come up with an additional $150 billion to replenish its rapidly diminishing funds. While the World Bank aims to reduce global poverty largely through long-term projects in the developing world, the IMF is charged with offering bigger, more immediate bailouts to countries on the verge of economic collapse. The list of countries fitting that description has soared in recent months.

In November alone, the IMF parceled out $50 billion to nations in crisis -- the most the institution has ever spent in a single month. With more nations, particularly in Eastern Europe and Central Asia, facing serious trouble, the IMF is preparing to hand out tens of billions more. It is hoping to raise more funds from Western nations and other cash-rich countries such as China and those in the Middle East.

The concern now, however, is that the scope of the crisis may be so vast that even an extra $150 billion may not enough. Some fear that nations in Western Europe such as Austria, Ireland and Spain -- believed to have graduated from IMF lifelines decades ago -- may soon require bailouts, taking funds that would have been spent on poorer nations. It could also prove difficult to raise more money from hard-hit countries including the United States and Britain, where politicians and citizens may decide that charity begins at home.

"I'm worried about what happens when you see that a Greece or an Ireland that might need bailouts," said Simon Johnson, an MIT economics professor and former IMF chief economist. "Where is the money going to come from?"