WASHINGTON DC, USA — The global recovery has evolved better than expected, declared the International Monetary Fund’s (IMF) Economic Counsellor and Director of Research Department, Olivier Blanchard.

Speaking at Wednesday’s World Economic Outlook (WEO) Press Conference held at the IMF Headquarters in Washington DC, Blanchard said: “We now forecast global growth to reach 4.2 per cent in 2010, a upward revision of 0.3 per cent from our January forecast, and 4.3 per cent in 2011. Alongside growth, global trade has also shown a strong rebound, and so have capital flows. And, as discussed in the newly released Global Financial Stability Report, financial market conditions and stability have improved.”

However the senior IMF economist was quick to point out that these encouraging numbers should not bring on overt optimism because there still remains a tepid recovery in many advanced economies, and a much stronger one in most emerging and developing economies, thus painting a picture of growth at different speeds in different regions.

Advanced economies

“We forecast growth in advanced economies to be 2.3 per cent for 2010 and 2.4 per cent in 2011. This is just not enough to make up for the ground lost during the recession. Output for these countries is now seven per cent below its pre-crisis trend, and this “output gap” is expected to remain large for many years to come. Associated with this prolonged output gap is persistent high unemployment. We forecast the unemployment rate in advanced economies to reach 8.4 per cent in 2010, and to only decline to 8.0 per cent in 2011,” said Blanchard at the Press Conference, which is part of the IMF/World Bank Group’s Spring Meetings 2010.

According to the director of the IMF’s Research Department, the main factor behind this weak performance and this prolonged output gap is weak private demand. He believes that in the US, consumers, who were the drivers of the economy before the crisis, are being more prudent.

Looking across the more developed economies he noted, “In Europe, where banks play a central role in financial intermediation, the weak banking sector limits credit supply. In Japan, deflation has reappeared, leading to higher real interest rates, and putting in danger an already weak recovery.

Emerging and developing economies

The IMF’s World Economic Outlook sees somewhat stronger growth prospects in the emerging economies of the world which in many instances were growing at a good clip before the crisis of 2008.

“We forecast growth in emerging and developing economies to be much stronger, 6.3 per cent in 2010, and 6.4 per cent in 2011. Developing Asia is in the lead, with forecasts of 8.7 per cent for 2010, and 8.6 per cent in 2011. Growth appears not only strong but sustainable. While fiscal policy often played a central role in supporting activity in 2009, private demand is strengthening, and can sustain growth in the future,” said Blanchard.

Challenges

The way Blanchard sees it, the asymmetric nature of the recovery creates serious challenges, both for advanced and for developing and emerging market economies. In developed countries like the US, Canada and Europe, the main challenge is fiscal consolidation. Last year there was a school of thought that private demand would collapse, leading to another Great Depression scenario. This lead to the implementation of massive fiscal stimulus measures to avoid the unthinkable — the crash of world markets and the destruction of the banking system.

“This we did. Thanks in part to the stimulus programmes, demand did not collapse, and has indeed started to grow again, if only weakly. One year later however, the risk has shifted location. The loss in fiscal revenues associated with the loss in output is threatening to lead, if not contained, to a debt explosion. In most countries, fiscal consolidation must increasingly be the priority,” declared Blanchard.

He sees emerging and developing countries like India, Brazil and China faced with a different set of challenges of which the main one is large capital inflows. He noted that higher growth prospects and higher interest rates are attracting large capital inflows.

“Such inflows, especially when driven by growth prospects, are fundamentally good news, but we have learned from experience that they can also lead to booms and busts. Thus, the main policy issue facing recipient countries is how best to accommodate these flows, how much to let the currency appreciate, how to use macroeconomic policy, how to use macroprudential tools, reserves, and capital controls, to best avoid excesses and maintain stable growth.

Prescriptions

In the more advanced economies Blanchard and his team prescribes better fiscal consolidation but sees this likely to have an adverse effect on demand and thus on growth. So what can be done? To offset these adverse effects and maintain growth, these sophisticated economies may well need to depreciate their currencies so as to increase their net exports.

“This in turn, implies that emerging and developing countries, again as a whole, do the reverse, namely let their currency appreciate, and reduce net exports. It is in their global interest to do so, as this adjustment may be needed to sustain growth in advanced countries, and by implication, strong growth in the rest of the world.

” In China for example, a shift away from exports towards domestic consumption — a shift that requires both structural measures to decrease saving, and an appreciation of the currency — appears highly desirable.

The IMF remains optimistic and upbeat about a recovery and the green shoots of spring taking hold but stresses the importance of fiscal consolidation and maintaining sustained growth.

“Let me conclude: We find ourselves at an important new stage of the crisis. A global depression has been averted. The world economy is recovering, and recovering better than we had previously thought likely. This is certainly welcome news. But new — and no less formidable — challenges have presented themselves. Achieving strong, sustained and balanced growth will not be easy. It will require more work — namely fiscal consolidation in advanced countries, exchange rate adjustments, a rebalancing of demand across the world. These are the tasks facing policy makers over the next few years.”