Two-speed Recovery to continue into 2011 and beyond

Oliver Blanchard, chief econ of IMF gives his forecast for 2011 in this interview. He says not much is likely to change in 2011 and theme of 2010 will continue to apply:

IMF Survey online: What is your assessment of how the global economy turned out in 2010? What went better than you anticipated, and what does not look so good? 

Blanchard: The short answer is that there were no major surprises. We had forecast positive but low growth in advanced economies, fast growth in emerging economies, and, lo and behold, this is how the year has turned out.

Indeed, I just went back and compared outcomes to our forecasts as of last January. For advanced countries, we were right on the dot for the United States; things turned out a bit better than expected for core Europe; Japan had higher growth than we had anticipated, but it looks like a one-time phenomenon. As for emerging countries, we were right on the mark for China; India did better than we had forecast.

To say that there were no major surprises, however, is not the same as saying that things are fine. They are not. The two-speed recovery, low in advanced countries, fast in emerging market countries, is striking and its features are increasingly stark. They will probably dominate 2011, and beyond.

He says rebalancing the economies will be key step going forward:

IMF Survey online: For the past couple of years, the need for economic rebalancing has been the mantra of the IMF. As we begin 2011, where do we stand?

Blanchard: It should remain the mantra. Rebalancing, internal and external, continues to be crucial. Without this economic rebalancing, there will be no healthy recovery. The argument is very simple: Before the crisis, growth in many advanced countries came from excessive domestic demand, be it consumption, or housing investment. This could not go on. Those countries must rely on other sources of demand. Until now, they have used fiscal policy to prop up domestic demand. This was needed, but it is not sustainable. The deficit countries must rely more on external demand, on exports. And, by symmetry, surplus countries, many of them emerging markets, must do the reverse, shift from external demand to domestic demand and reduce their dependence on exports.

This is not to say that without rebalancing, the recovery cannot continue. Continued fiscal expansion, or a return by U.S. consumers to their old, low-saving ways can sustain demand and growth for some time. But they will recreate many of the problems that were at the root of the crisis. And guess what will come next …

IMF Survey online: What about exchange rate adjustments? Some argue that there is too much pressure on China to allow its currency, the yuan, to appreciate.

Blanchard: Rebalancing is a complex process. No single measure, no one country holds the solution on its own. Structural measures are required: for example, in Asia, measures to improve financial intermediation or provide more social insurance, in the United States, reforms of the financial intermediation system. But exchange rate adjustment is an integral part of the process.


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