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Global outlook Two-speed recovery

April 12, 2011

The International Monetary Fund predicts growth rates of about 4.5 percent for the global economy this year and next. But it’s an unbalanced growth that harbors different risks for advanced and emerging economies.

IMF Chief Economist Olivier Blanchard
The IMF says the road to recovery has two lanesImage: picture alliance/dpa

"The world economic recovery is gaining strength, but it remains unbalanced," IMF chief economist Olivier Blanchard told reporters as he presented the organization’s latest World Economic Outlook on Monday in Washington.

Blanchard explained that the recovery is moving at two speeds – a fast lane for China, India, and other emerging economies, and a slow lane for the traditional powerhouse economies of the United States, Europe, and Japan.

Industrialized countries will achieve an average of 2.5 percent economic growth over 2011 and 2012, while emerging economies are predicted to grow at an average 6.5 percent.

Blanchard pointed to high unemployment as one of the main problems slowing the recovery in advanced economies.

"In most advanced economies, output is still far below potential, unemployment is high, and low growth means that it is likely to remain so for several years to come," he said.

For Germany, the IMF slightly improved its prognosis, and is now predicting growth of 2.5 percent for the current year.

Old advice

Skyline of downtown Frankfurt
Europe's economies were warned to increase regulation of banksImage: Fotolia/Dreadlock

In many countries, the economic crisis led to a dramatic deterioration of state finances. Now countries are being forced to consolidate their budgets, Blanchard said. With regard to Europe’s ongoing debt and deficit crisis, he said recommended stringent stress tests for banks and a recapitalization of the financial sector.

"The advice that we are giving industrialized countries is the same old advice: the banking system has to become more crisis-resistant, and there needs to be a balanced consolidation of budgets," Blanchard said. He added that consolidation should not happen too quickly, as that could repress growth, but also not too slowly, as that would undermine credibility.

"Bank regulation has to be improved, especially in Europe," he said. "And reforms must continue to be undertaken to strengthen the growth potential."

Different risks for emerging economies

Although rising commodity prices and inflation pose new risks to the global recovery, they’re not strong enough to derail it, the IMF said.

Rising oil prices have sparked fears of a return to the record level seen in 2008, when high food and commodity prices unleashed political unrest in some countries. Indeed, soaring prices for basic staples have been a factor in the social and economic tensions that have shaken the Arab world in recent months.

Despite this, the IMF’s concern for emerging economies is that "they are getting to a point where things may be too good," Blanchard said. "We have a long history of countries waiting too long to do something about it."

To that end, the IMF issued warnings to emerging markets such as China, Brazil, and India to avoid asset bubbles similar to those that sparked the 2007–2009 financial crisis in the US and other rich nations.

"The challenge for many emerging and some developing economies is to ensure that present boom-like conditions do not develop into overheating over the coming year," the IMF said in its report.

With respect to Japan, the IMF said it saw little lasting impact from the triple disaster of earthquake, tsunami, and nuclear crisis. It revised its growth projection for the world’s third-largest economy down slightly for 2011, but raised its 2012 projection.

Author: Rolf Wenkel / dc
Editor: Sam Edmonds

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