IMF Survey: Two-speed Recovery to Extend into 2011, Says IMF

IMF News, December 30, 2010

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The two-speed global economic recovery is likely to dominate 2011, with weak growth in advanced economies and fast growth in emerging markets.
Advanced economies: growth described as "positive but low"; recovery is "slow" and "barely strong enough to decrease unemployment."
Emerging markets: rapid rebound in trade and strong domestic demand have returned many to high growth; challenges include avoiding overheating and handling strong capital inflows.
Quote: “Without this economic rebalancing, there will be no healthy recovery.”

IMF assessment: "no major surprises" relative to forecasts made in January 2010.
Specific outcomes versus forecasts:
- United States: "right on the dot."
- Core Europe: "things turned out a bit better than expected."
- Japan: "had higher growth than we had anticipated, but it looks like a one-time phenomenon."
- China: "we were right on the mark."
- India: "did better than we had forecast."

Rebalancing remains central policy priority for 2011.
Advanced "deficit countries" should shift toward reliance on external demand (exports).
Surplus countries, "many of them emerging markets," should shift from external demand to domestic demand and reduce dependence on exports.
Structural measures highlighted:
- In Asia: improve financial intermediation; provide more social insurance.
- In the United States: reforms of the financial intermediation system.
Exchange rate adjustment is identified as "an integral part of the process."

Capital inflows can help:
- By inducing appreciation that shifts demand from external to domestic.
- By making borrowing easier and cheaper, boosting domestic demand.
Concerns for emerging markets:
- Volatility: flows "will come and go."
- Intermediation capacity: ability to absorb high flows.
- Risks of over-appreciation and overheating.
Current assessment: "we have not seen the tsunami of flows that is sometimes described in the press."
Policy need: agree on broad "rules of the road" recognizing country circumstances and global links.

Impact mainly via trade channel due to limited financial integration.
Improved outlook as trade recovers and commodity prices rise from emerging market growth.
Example: "Sub-Saharan Africa, for example, grew at more than 5 percent in 2010, and we forecast roughly the same for next year."
Contributing factors: past sound policies enabling fiscal support; strong private domestic demand.

Several European countries face "a tough and long macroeconomic adjustment."
Causes: excessive domestic demand pre-crisis, large current account deficits for some.
Euro-area constraint: countries in the euro with a fixed exchange rate face a "long and tough slog."
Policy emphasis:
- Medium-term fiscal anchoring: "a credible path to debt stabilization, and eventually debt reduction" rather than dramatic cuts now.
- Joint EU-IMF programs can help by:
- Putting a ceiling on government borrowing interest rates to avoid multiple equilibria.
- Reinforcing credibility of commitments and reassuring markets.
Banking concerns:
- Current fears about the banking system are "suspect[ed]" to be overstated.
- Remedy: increased transparency, timely and credible stress tests, and clearer rules on burden sharing among creditors, national governments, and the EU.
- Belief expressed that bailout amounts "can be quite limited" once proper assessments are done.

G-20 played a central role during the acute crisis; its role is more challenging now as country problems diverge.
The G-20 mutual assessment process (MAP), with IMF acting as expert consultant, can:
- Give policymakers a sense of the global landscape.
- Show implications of current policies and dangers of an unbalanced recovery.
- Explore alternative policies and improve the quality of dialogue.
MAP improves the odds of successful coordination but "does not guarantee success."

IMF Survey: Two-speed Recovery to Extend into 2011, Says IMF (IMF Survey online, December 30, 2010)