## World Faces Serious New Economic Challenges

_IMF Blog, April 21, 2010_

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## Bibliographic details
- Authors: Olivier Blanchard
- Published: April 21, 2010

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### Global outlook and summary findings
- Global growth forecast: 4.2% in 2010 (upward revision of 0.3% from January forecast) and 4.3% in 2011.
- Global trade and capital flows: strong rebound.
- Financial market conditions and stability: improved (as discussed in the newly released Global Financial Stability Report).
- Recovery is asymmetric: tepid recovery in many advanced economies versus much stronger recovery in most emerging and developing economies.

### Advanced economies: performance and risks
- Growth forecasts: 2.3% for 2010 and 2.4% in 2011.
- Output gap: output is now 7% below its pre-crisis trend; this “output gap” is expected to remain large for many years.
- Unemployment forecasts: 8.4% in 2010 and 8.0% in 2011.
- Main factor behind weak performance: weak private demand.
  - United States: consumers are being more prudent.
  - Europe: weak banking sector limits credit supply.
  - Japan: reappearance of deflation leading to higher real interest rates and endangering recovery.
- Policy priority shift: from emergency fiscal stimulus to fiscal consolidation to contain risks of a debt explosion caused by loss in fiscal revenues associated with the loss in output.

### Emerging and developing economies: performance and risks
- Growth forecasts: 6.3% in 2010 and 6.4% in 2011.
- Developing Asia: forecasts of 8.7% for 2010 and 8.6% in 2011.
- Demand composition: while fiscal policy supported activity in 2009, private demand is strengthening and can sustain growth.
- Main challenge: large capital inflows driven by higher growth prospects and higher interest rates.
  - Risks: booms and busts from large inflows.
  - Policy issues for recipients: how to accommodate flows; how much to let the currency appreciate; how to use macroeconomic policy, macro-prudential tools, reserves, and capital controls to avoid excesses and maintain stable growth.

### Policy linkages and mutually reinforcing solutions
- Interaction between advanced and emerging economies:
  - Advanced economies need fiscal consolidation, which is likely to reduce domestic demand and adversely affect growth.
  - To offset adverse demand effects and maintain growth, advanced countries, as a whole, may need to depreciate their currency to increase net exports.
  - This implies emerging and developing countries, as a whole, should allow their currencies to appreciate and reduce net exports to support global rebalancing.
- National example:
  - China: a shift away from exports toward domestic consumption is desirable; this requires structural measures to decrease saving and an appreciation of the currency.

### Policy recommendations and tasks for policymakers
- Advanced economies:
  - Prioritize fiscal consolidation to avoid a debt explosion.
  - Manage the adverse effects of consolidation on demand, potentially through exchange rate adjustments (depreciation as a group).
- Emerging and developing economies:
  - Manage large capital inflows to avoid booms and busts.
  - Use a mix of tools: allow currency appreciation where appropriate, apply macroeconomic policy, deploy macro-prudential measures, build reserves, and consider capital controls if needed.
  - Pursue structural reforms to rebalance demand toward domestic consumption (example cited: China).
- Global coordination:
  - Recognize that exchange rate adjustments and demand rebalancing across countries are interconnected and in the global interest to sustain balanced growth.

### Conclusion: new stage of the crisis
- Outcome to date: a global depression has been averted; the world economy is recovering and better than previously expected.
- New challenges: achieving strong, sustained and balanced growth will require fiscal consolidation in advanced countries, exchange rate adjustments, and a rebalancing of demand across the world.
- Time horizon: these are the tasks facing policymakers over the next few years.

*Source: Olivier Blanchard, April 21, 2010 — World Faces Serious New Economic Challenges*

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## References

- [forecast](http://www.imf.org/external/pubs/ft/weo/2010/01/index.htm)
- [Global Financial Stability Report](http://www.imf.org/external/pubs/ft/gfsr/2010/01/index.htm)
- [unemployment](http://www.imf.org/external/pubs/ft/survey/so/2010/RES041410A.htm)
- [capital inflows](http://www.imf.org/external/pubs/ft/survey/so/2010/NEW041310A.htm)

_Source: https://www.imf.org/en/blogs/articles/2010/04/21/world-faces-serious-new-economic-challenges_