The world economy, led by
emerging market and developing countries, is forecast to grow by 4.8% in 2010
before falling back to 4.2% next year, but a sharper global slowdown is
unlikely, the IMF says in its latest forecast. Irish GDP (gross domestic
product) growth forecast at -0.3% in 2010 and 2.3% in 2011.
With the world still trying to bounce back from the global economic crisis,
the IMF says in its latest
World Economic Outlook that the recovery remains fragile and uneven.
Unemployment remains a major economic and social challenge. More than 210
million people across the globe may be unemployed, an increase of more than 30
million since 2007. Three-fourths of the increase has occurred in advanced
economies, the IMF said.
“The world economic recovery is proceeding,” IMF Chief Economist
Olivier Blanchard told a press conference. “But it is an unbalanced recovery,
sluggish in advanced countries, much stronger in emerging and developing
Achieving more balance
The key policy challenge is to effect a smooth transition from public to
private sector-led growth in many advanced economies, and from external to
domestically driven growth in key emerging economies. While short-term
macroeconomic policies are broadly appropriate, completing the two rebalancing
acts will require tackling the medium-term fiscal, financial, and structural
challenges raised by the crisis.
Blanchard said that the pieces of the global economy were interconnected and
countries should act in coordination. “Unless advanced countries can count on
stronger private demand, both domestic and foreign, they will find it difficult
to achieve fiscal consolidation. And worries about sovereign risks can easily
derail growth,” he warned.
“If growth were to slow or even stop in advanced countries, emerging
market countries would have a hard time decoupling. The need for careful design
at the national level, and coordination at the global level, may be even more
important today than they were at the peak of the crisis a year and a half ago.”
The report notes that economies are recovering at different speeds and
intensities (see table above). Recoveries in most advanced and a few emerging
economies are moving at a sluggish pace and unemployment is high, holding back
consumption. Improvements in business investment in the hard-hit economies have
not translated into substantially lower unemployment. Financial sector
weaknesses remain largely unresolved, undermining credit provision. By contrast,
many emerging and developing economies, which did not have major financial
excesses prior to the Great Recession, are again seeing strong output and
Global activity is forecast to expand by 4.8% in 2010 and 4.2% in 2011,
broadly in line with earlier IMF staff projections. In advanced economies,
growth is projected at 2.7% in 2010 and 2.2% in 2011, with some economies
slowing noticeably during the second half of 2010 and the first half of 2011. As
a result, economic slack will remain substantial and unemployment persistently
high for some time.
Eurozone growth is forecast at 1.7% up 0.2% from the previous forecast. GDP
growth of 1.6% in 2011.
Prospects are better for emerging and developing economies, which are
projected to expand at rates of 7.1% and 6.4% for 2010 and 2011. Inflation is
projected to stay generally low, amid continued excess capacity and high
unemployment, with a few exceptions among the emerging economies.
The WEO says for countries such as Spain and Ireland
there is an additional reason to expect slow recovery. The feedback loop between
credit and collateral prices created a construction boom, significantly
distorting the allocation of resources. As a result, the construction sector
grew disproportionately to other sectors of the economy and became the engine of
growth in these economies. The share of construction in total value added stood
at 12% in Spain and 10% in Ireland by the end of 2006, compared with the
Eurozone average of just under 7%. The housing bust thus brought a severe
contraction in construction output and employment. The unemployment rate is now
three times its 2000–07 average in Ireland and twice its 2000–07 average in
Spain, compared with a 20% increase on average among Eurozone countries.
Reallocation of labour away from construction is likely to take
considerable time, which will keep
Need for coordinated policies
The IMF says to spur a stronger recovery and more employment growth,
government policies need to become more proactive and coordinated to achieve the
internal and external rebalancing required for robust real GDP and employment
growth. “Historical evidence suggests that countries hit by financial crises
typically suffer permanent output losses relative to precrisis trends,” the
report says. “However, outcomes after individual crises have varied widely,
depending on the policy responses.”
Households and companies have already scaled back expectations for growth
over the next one or two years. Policymakers must avoid paralysis and put in
place policies to strengthen medium-term prospects. “The challenge ahead if
for policymakers to put in place, in a coordinated manner, policies that support
the fundamental adjustments needed for a return to healthy medium-term growth,”
the report states.
The IMF has warned that the financial sector remains the Achilles’ heel of
the recovery. The global crisis was rooted primarily in the financial sector and
the failure of policymakers to grasp the depth and breadth of ways in which
financial shocks could be amplified across financial institutions and economies.
Ensuring that a still-damaged financial sector does not act as a drag on
- restructuring or resolving weak banks;
- enhancing banks’ capital adequacy and liquidity buffers;
- pursuing orderly and globally consistent regulatory reform; and
- trengthening supervision and oversight of the financial system.
Monetary and fiscal responses
The WEO report says monetary policy should stay highly accommodative to
support activity and help bring down unemployment, but fiscal consolidation
needs to start in 2011 in the advanced economies. If global growth threatens to
slow appreciably more than expected, countries with budgetary room could
postpone some of the planned consolidation.
One of the most urgent challenges for advanced economies is to adopt plans
that help achieve sustainable fiscal positions before the end of the decade.
This task is now more pressing than it was six months ago to rebuild room for
fiscal policy maneuver in the face of still volatile sovereign debt markets.
Such room could be needed because monetary policy alone might not be able to
provide sufficient support to counter a threat for a markedly more
pronounced-than-expected weakening of activity.
The IMF says emerging economies that relied heavily on demand from advanced
economies will have to rebalance growth further toward domestic sources to
achieve growth rates similar to those before the crisis. In economies with
excessive external surpluses, removing distortions that drive high household or
corporate saving rates and deter investment in nontradable sectors would
facilitate the rebalancing of growth to domestic sources. Such rebalancing will
also require further deregulation and reform of financial sectors and corporate
governance, as well as stronger social safety nets in key Asian economies.