Friday, October 2, 2009

Surplus nations urged by IMF to take up baton

By Chris Giles in Istanbul

Published: October 1 2009 07:34 | Last updated: October 1 2009 22:27

Growth has returned to the world economy, the International Monetary Fund announced on Thursday, but the coming recovery will be weak unless countries with large trade surpluses pick up the baton as the motors of demand.

To ensure sustained growth into the medium term, surplus countries, including China, must act to boost domestic spending and accept an appreciation of their currencies, said Olivier Blanchard, the IMF’s chief economist.

The tough IMF stance on the measures China, Germany, Japan and oil exporters needed to take to ensure a global recovery strikes a chord with US views on global trade imbalances and puts the fund on a collision course with Beijing and Berlin.

With the first upgrade in the IMF’s economic forecasts for over two years, Mr Blanchard said the twice-yearly World Economic Outlook showed “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 forecast that world economic output would rise by 3.1 per cent next year after contracting 1.1 per cent in 2009, an upward revision of 0.6 percentage points for 2010 from its most recent forecast in July.

Emerging economies will grow much more quickly than advanced economies, the IMF says, with growth averaging 5.1 per cent in the emerging world and only 1.3 per cent in rich countries.

Although the IMF dismissed fears of a double-dip recession, it stressed that the recovery was likely to be “weak by historical standards”.

Mr Blanchard warned that the upswing would be sluggish in the months ahead because it was based on public spending and restarting companies’ mothballed production lines as unsold stock was finally shifted. “This is true of the US and most other advanced countries, but it is also true of emerging market countries,” he said.

The IMF also held out little hope that rapid growth would put world output back on the path expected before the crisis. Its latest forecast for world output is roughly 10 per cent lower than its prediction in April 2007.

For the medium term, Mr Blanchard insisted that the world needed to rebalance demand away from public support and towards the private sector; and from trade deficit countries, such as the US, towards those with trade surpluses.

“The strength of the world recovery will depend on these two rebalancing acts,” he said.

Unlike the Group of 20 leaders, the IMF did not pull its punches on the need for global currencies to shift to fostering this rebalancing. “It is very hard to see how this could happen at current exchange rates,” Mr Blanchard told a news conference.

“In gen­eral it is very hard to see how global rebal­ancing doesn’t come with an appreciation of Asian ­currencies.”

Such an aggressive stance on the need for currency realignment and demand growth in surplus countries will not be popular in Germany, Japan and China, which argue they are not to blame for producing goods others want to buy.

But Mr Blanchard expressed confidence that surplus countries’ resistance would soon fade. “I think the difference is that, this time, global rebalancing may well be needed to sustain the recovery,” he said.

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