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IMF Says Public Debt, Fragile Banks Pose Risks to Growth
By Sandrine Rastello - Oct 6, 2010 3:44 PM GMT+0100 Tweet (8)LinkedIn Share
Business ExchangeBuzz up!DiggPrint Email . Olivier Blanchard, chief economist for the International Monetary Fund (IMF). Photographer: SeongJoon Cho/Bloomberg


Play VideoOct. 6 (Bloomberg) -- David Mann, senior strategist at Standard Chartered Plc, talks about the outlook for the currency market. Mann, speaking with Deirdre Bolton on Bloomberg Television's "InsideTrack," also discusses concerns over possible protectionist trade policies and central bank manipulation of exchange rates. (Source: Bloomberg)
High unemployment, public debt and fragile banking systems pose risks to global prosperity, the International Monetary Fund said, urging policy makers to take bolder steps to assure a sustained recovery.

The world economy will expand 4.2 percent next year, the Washington-based IMF said in a report, down from its forecast of 4.3 percent three months ago. The fund projects growth of 4.8 percent this year, up from 4.6 percent.

Many advanced nations such as the U.S. have yet to adopt policies that will reduce their reliance on government spending and strengthen household demand and exports, the IMF said. At the same time, developing nations such as China are keeping their currencies weak and remain overly dependent on overseas sales to spur growth.
“The result is a recovery that is neither strong nor balanced and runs the risk of not being sustained,” chief economist Olivier Blanchard wrote in an introduction to the IMF’s World Economic Outlook. “If growth stops in advanced economies, emerging-market economies will have a hard time decoupling,” he said. Global coordination “may be even more important today than at the peak of the crisis.”

Nations such as China and Brazil are powering the return to growth, widening a gap with advanced economies from Europe to the U.S. that are struggling to revive domestic demand, the IMF said. Developing nations will grow 6.4 percent next year, unchanged from the previous forecast, while advanced economies will expand 2.2 percent, down from an earlier 2.4 percent forecast, the IMF said.

Exchange Rates

The fund urged emerging economies to allow greater exchange-rate flexibility, while their developed counterparts should reduce deficits, step up financial repair and keep accommodative monetary policies in place.

Such steps are part of two “rebalancing acts” needed to assure a sustained recovery, the IMF said. One entails a shift from public stimulus to private demand in developed countries. The second involves an external shift, with countries such as the U.S. relying more on exports, while developing nations turn to domestic sources of growth.

“Many emerging-market economies continue to run large current-account surpluses and to respond to capital inflows primarily through reserve accumulation rather than exchange-rate appreciation,” Blanchard wrote. “International reserves are higher than they have ever been and continue to increase.”

Group of 20

Blanchard, speaking at a press conference today, said exchange-rate adjustment “is becoming a more and more important” issue for Group of 20 countries to discuss as part of efforts to achieve a more balanced growth.

“I’m optimistic that the G-20 can actually work out a solution,” he said in Washington. “We’re just at the beginning of the process.”

Japan last month sold the yen for the first time in six years to spur exports and growth, joining countries across Asia and Latin America that have tempered gains in their currencies against the dollar. Brazil’s Finance Minister Guido Mantega warned Sept. 27 of a “currency war” and said that his government will buy all “excess dollars” in the market to curb the real’s appreciation.

Both the euro and the yen are “broadly in line with medium-term fundamentals,” the IMF said, while the dollar is “on the strong side.”

China’s Yuan

“With a few exceptions,” emerging Asian currencies, including China’s yuan, “appreciated modestly in real effective terms,” with many remaining “undervalued relative to medium- term fundamentals,” IMF economists said.

U.S. Treasury Secretary Timothy F. Geithner called on major emerging-market nations to move more quickly to adopt flexible currency policies.

“It is very important to see more progress by the major emerging economies to more flexible, market-oriented exchange rate systems,” Geithner said today in a speech in Washington.

Geithner said he sees a “damaging dynamic” as a growing number of nations counters pressure on their currencies to appreciate. He said the collective impact of such actions risks causing either inflation or asset bubbles in emerging economies or depressing consumption growth.

Geithner didn’t mention any specific countries in his comments today. Last month, he said the pace of the yuan appreciation has been “too slow.”

The IMF cut the 2011 growth forecast for every Group of Seven industrial nation except Germany and France. It kept its forecast for France next year unchanged at 1.6 percent and raised Germany’s to 2 percent from 1.6 percent.

The U.S. economy is forecast to grow 2.6 percent this year, down from an earlier forecast of 3.3 percent. Next year, the world’s largest economy will grow 2.3 percent instead of 2.9 percent.

Japan’s gross domestic product will increase 2.8 percent in 2010, more than the 2.4 percent forecast in July, before slowing to 1.5 percent next year, the fund said.

For the euro area, the IMF raised its forecast for 2010 to 1.7 percent from 1 percent and also increased its 2011 outlook 0.2 percentage point to 1.5 percent.

Risks to financial stability increased over the past six months because of the European debt crisis that started in Greece, even though market conditions have eased in the past few months, the IMF said.

It warned that without “strong” and “credible” fiscal tightening plans over the next few years, debt markets will continue to threaten the recovery.

Aid to Greece

The IMF, which over the past 18 months has shored up economies from Greece to Ukraine, also warned that housing will remain a “drag on growth” in many parts of the world as well as a risk to lenders.

“Sluggish” growth in most advanced economies means that unemployment will stay high, which “poses major social challenges” and will contribute to low inflation.

Monetary policy “wherever private demand is weak” should continue being “accommodative,” Blanchard wrote, while cautioning that “not much more can be done, and one should not expect too much from further quantitative or credit easing.”

Among major emerging markets, the fastest growth will be in China, which this year overtook Japan as the world’s second- largest economy.

China will expand 10.5 percent in 2010 and 9.6 percent next year. India’s growth will slow to 8.4 percent from 9.7 percent, and Brazil’s will cool to 4.1 percent from 7.5 percent.

Mexico’s 2010 forecast was raised the most, to 5 percent this year, from a 4.5 percent. Next year, it will expand 3.9 percent, the fund said.

Inflation in emerging economies should reach about 5 percent next year, the IMF estimated.

“Central banks in emerging and developing economies must be alert to second-round effects on wages from higher food prices or upside surprises to energy prices,” it said.

Still, while demand should continue to support commodity prices, the IMF expects price pressures to remain “moderate” and to “be balanced by other forces” such as moderating growth in China.