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International Monetary Fund's chief economist Olivier Blanchard presents the World Economic Outlook October 6, 2010 at the IMF Headquarters in Washington, DC. Blanchard said "the world economic recovery is proceeding". IMF Photograph/Stephen Jaffe
The two-speed global economic
recovery is likely to dominate 2011, with weak growth in advanced economies
barely enough to bring down unemployment and emerging markets facing the
challenges of success, including how to avoid overheating and handle strong
capital inflows, the IMF’s chief economist, Olivier Blanchard, said.
“The two-speed recovery, low in
advanced countries, fast in emerging-market countries, is striking and its
features are increasingly stark,” Blanchard said in comments distributed from
Washington DC, at the year end. “They will probably dominate 2011, and beyond.”
In an assessment of the global economy at the end of 2010, and the prospects
for 2011, Blanchard said that countries should continue to focus on rebalancing
their economies in the coming year, including structural measures and exchange
“Without this economic rebalancing, there will be no healthy recovery,” he
told IMF Survey, the online magazine of the International Monetary Fund
In an interview, Blanchard
referred to the central role of the Group of Twenty (G-20) advanced and emerging
market economies in helping during the global crisis and the need for continued
cooperation to build on the recovery, as well as the prospects for both Europe
and low-income countries.
Assessing the global economy in 2010, he said, “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."
The following is the text of the interview:
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
"The turnaround in trade has been nearly as sharp as the earlier collapse,"
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.
IMF Survey online: What do you mean? Tell us more about this
Blanchard: Emerging market countries were affected by the
crisis through both trade and financial channels. The turnaround in trade has
been nearly as sharp as the earlier collapse. But while trade has not yet fully
recovered, most emerging market countries have been able to increase domestic
demand so as to return to high growth. In turn, their good performance has led
capital flows to come back, in some cases, with much force. For many of these
countries, the challenges are now how to avoid overheating and how to handle
In many advanced economies, the crisis damage was much deeper. The financial
system was badly broken. Securitization has to be reinvented. In many of these
countries, markets are still uncertain about the true health of banks and
financial intermediation is not working well. Combine this with the need to
correct past excesses, from low saving to excess housing investment and the
result is a slow recovery, barely strong enough to decrease unemployment. This
is painful but not that surprising. The evidence, which we had documented in
a chapter of the World Economic Outlook last year, is that recoveries from
financial crises are long and slow.
"For those countries in the euro and thus operating under a fixed exchange
rate, this is going to be a long and tough slog,"
- - Blanchard
of Limerick economist Stephen Kinsella
writes in The Guardian: "Unless medical and
pharmaceutical production (or some other high-growth export sector) becomes
much more labour-intensive, export led growth won't lead to a significant
reduction in the unemployment level."
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
80% of new jobs out of the US will come from small-to-medium size businesses, says Geoff Howie, sales and markets strategist at MF Global Singapore. He explains why to Yuwa Hedrick-Wong of MasterCard Worldwide and CNBC's Martin Soong & Sri Jegarajah:
IMF Survey online: Aren’t capital inflows to emerging market
countries a growing worry?
Blanchard: If well used, these capital flows can help rather
than hurt. By leading to an appreciation, they help shift countries away from
external demand toward domestic demand. And, by making it easier and cheaper to
borrow, they can boost domestic demand.
This being said, some emerging market countries rightly worry that capital
flows will come and go. They worry about their ability to intermediate the high
flows and in some cases they worry about the risks of over-appreciation as well
as overheating. So far, we have not seen the tsunami of flows that is sometimes
described in the press. But, agreeing on broad “rules of the road” that take
into account both country circumstances as well as global links will be one of
the major challenges in the year to come.
IMF Survey online: What about low-income countries? What are
The acceleration of growth seen in India, Indonesia and Vietnam is largely driven by domestic demand, notes Tai Hui, regional head of economic research, South East Asia at Standard Chartered Bank. He tells CNBC's Martin Soong & Sri Jegarajah more:
Blanchard: Because of their more limited financial
integration with the world economy, low-income countries were mostly affected by
the crisis through the trade channel. As trade has largely recovered, and as
strong growth in emerging market countries has pushed up commodity prices, many
of them are doing well. Sub-Saharan Africa, for example, grew at more than 5
percent in 2010, and we forecast roughly the same for next year. Their
performance, however, is not only due to exports. Previous sound policies
allowed many to use fiscal measures to support their economies. And private
domestic demand typically has also been quite strong.
IMF Survey online: Let us turn to Europe. What’s the outlook
there, particularly for some of the countries on what is termed the periphery
Blanchard: There is no question that a number of countries
in Europe face a tough and long macroeconomic adjustment. In most cases, they
would have had to do so whether or not the global crisis had taken place. The
global crisis only makes it tougher.
They had, based on what turned out to be unduly optimistic expectations,
increased domestic demand excessively, and some had run very large current
account deficits. Like others, but more so than others, they must shift from
domestic demand to external demand. For those countries in the euro and thus
operating under a fixed exchange rate, this is going to be a long and tough
Stronger growth in core Europe, if it comes, will strengthen their exports
and help the adjustment. But, based on past experience, a full return to health
will likely take a long time. Social programs are essential, both for their own
sake and to maintain broad political support.
IMF Survey online: What about fiscal and banking problems?
Blanchard: Except for Greece, the fiscal woes are the result
of the macro slump, not of irresponsible fiscal behavior. Can the countries
achieve fiscal sustainability? They can, but another IMF fiscal mantra should be
repeated here: What is essential is not so much dramatic cuts now but
medium-term anchoring, a credible path to debt stabilization, and eventually
Can they do it on their own? I fully understand the reluctance of countries
to ask for a joint program from the European Union and the IMF. But such
programs can help, in two ways: First, by putting a ceiling on the interest rate
at which governments can borrow, the programs eliminate the risk of multiple
equilibria—that is the risk that investors, right or wrong, ask for high
interest rates, making it impossible for the countries to repay, and making the
investors’ fears self fulfilling. Second, even if the programs do not ask for
more than the country intended to do on its own, they reinforce the credibility
of these commitments, and reassure markets about the medium run.
In addition to fiscal worries are the current fears about the banking system.
I suspect these are overstated. But, the only way to decrease those fears is
increased transparency, and, for this, the sooner the better. In practice, this
means new, more credible stress tests, together with clearer rules about burden
sharing: How much of the losses will be absorbed by creditors, by national
governments, by the EU. There is a lot of loose talk about bailouts. My belief
is that the bailout component, either by national governments, or the European
Union, can be quite limited. But we shall only know that once the homework has
IMF Survey online: You have talked about rebalancing, and
what countries have to do. What can we expect from the G-20, and in particular
from the G-20 mutual assessment process, the so-called MAP?
Blanchard: There is no question that the Group of Twenty has
played a central role in the crisis. So long as the crisis was acute, it
provided just the right forum for strong and fast action. Now that the crisis is
less acute, and countries increasingly face different problems, agreement is
clearly harder to achieve, and, as we saw in the buildup to Seoul, discussions
can be intense.
But discussions take place as part of the G-20 process, both in public view
and behind the scenes. And here, the G-20 MAP process, in which the Fund acts as
an expert consultant to the G-20, can play a central role. It can give national
policymakers a sense of the world economy landscape, show the implications of
current policies, show the dangers of an unbalanced recovery, explore
alternative policies, and make for a much more informed dialogue. This does not
guarantee success. But it surely improves the odds.
There is no risk of a break up of the Eurozone because of the shared political commitment to the common currency, Société Générale Chairman and CEO Frédéric Oudéa told CNBC. Fears of contagion from the Eurozone debt crisis have been overblown, he said:
The euro will still be around in ten years time, Jan Randolph, head of sovereign risk at IHS Global Insight, told CNBC Wednesday. Randolph considers the outlook for the Eurozone: