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IMF sees stronger global economic rebound next year

IMF sees stronger global economic rebound next year
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First Published: Thu, Oct 01 2009. 04 38 PM IST
Updated: Thu, Oct 01 2009. 04 38 PM IST
Istanbul: The world economy is finally stirring from a deep recession led by a swift turnaround in Asia, the International Monetary Fund said on Thursday, raising its forecast for global economic growth next year.
After a year of being downbeat about prospects for the world economy, the IMF’s latest World Economic Outlook declared the global recession is ending.
“The recovery has started. Financial markets are healing and in most countries growth will be positive for the rest of the year as well as in 2010,” the IMF’s chief economist Olivier Blanchard told a news conference here before the start of World Bank and IMF meetings.
The Fund now expects world output to contract by 1.1% in 2009 before growing by 3.1% in 2010. This is more upbeat than its last outlook in July when the Fund projected the world economy would shrink 1.4% in 2009, before expanding 2.5% in 2010.
Meanwhile, a Turkish student threw a shoe which landed at IMF managing director Dominique Strauss-Kahn’s feet on Thursday as he made a speech to students in Istanbul.
The incident echoed that of an Iraqi journalist who last December hurled his shoes, a grave insult in the Muslim world, at then US President George W. Bush.
Blanchard said at his news conference that the strength of the world economy will depend on rebalancing of global growth, in particular more domestic consumption in export-driven countries like China and more savings in big-spenders like the United States.
Leaders from Group of 20 nations last week agreed to adopt a framework by November for rebalancing economic growth.
Blanchard also said it was hard to see how global rebalancing could happen at current exchange rates.
“If you think about global rebalancing you realize it is going to have to come from a number of measures and from a number of adjustment. It is very hard to see how this could happen at the current exchange rates,” he said.
“In general, it is very hard to see how global rebalancing doesn’t come with an appreciation of Asian currencies,” he added, without mentioning China’s currency, the yuan, which the IMF has said is substantially undervalued.
The IMF report said beginning in late 2010, global growth is expected to average a little more than 4% a year, below the 5% growth rates before the financial crisis erupted, the IMF report said.
While advanced economies will contract this year, they will begin a fragile recovery in 2010, the report said. Both the United States and euro area will post growth, albeit at a tepid pace, next year, it added.
Spain will be the only euro area member whose economy will contract next year, the IMF said, adding that the pace of the economic decline in Europe has started to moderate.
In contrast, emerging and developing economies are further ahead in the recovery and will expand by 1.5% this year before rebounding 5% next year led by China and India, it said, also noting signs of stabilization in Latin America.
The IMF revised up China’s growth forecast for next year to 9% from a July estimate of 8.5%. Meanwhile, in Japan the economy is expected to recover by 1.7% next year, buoyed by fiscal and monetary stimulus measures.
The Fund said the recovery in eastern Europe, which was hardest hit by the financial crisis, will lag other emerging economies, especially the Baltic nations Latvia, Lithuania and Estonia.
Still, the IMF cautioned that the pace of the overall global recovery is expected to be sluggish for quite some time and the biggest risk is if governments withdraw their support too soon, causing the recovery to stall.
It urged policymakers not to disrupt the recovery by relaxing efforts to strengthen the financial sector and by prematurely withdrawing expansionary economic policies.
In major economies, authorities can still afford to maintain accommodative conditions for a while because inflation is likely to remain subdued, the IMF said.
The challenge going forward is to map a middle course between unwinding stimulus measures too early and leaving them there too long, which could damage government balance sheets.
In emerging markets, raising interest rates could happen sooner than in advanced economies, the IMF said, also warning that in some countries warding off risks of new asset price bubbles may require greater exchange rate flexibility.
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First Published: Thu, Oct 01 2009. 04 38 PM IST
More Topics: IMF | Economy | Growth | Dominique Strauss-Kahn | G-20 |