News Analysis: For global recovery, a laundry list of risks

08:53, October 09, 2010      

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More than two years since the onset of the worst recession since the 1930s, advanced economies are starting to revive -- at a snail's pace.

While respectable growth is expected of the global economy -- nearly 5 percent this year and more than 4 percent next year -- demand is still weak in many advanced countries and unemployment still lingers at or near the double digits in both the United States and the Euro zone, according to the International Monetary Fund (IMF)'s World Economic Outlook released on Wednesday.

While a rebound is proceeding, experts fear any number of factors -- from debt consolidation to anti-trade sentiment -- could damage the still fragile recovery.


According to the IMF, the main challenge for advanced economies is fiscal consolidation.

"What is essential here is not to so much to phase out fiscal stimulus now, but to offer a credible medium term plan for debt stabilization, and eventually for debt reduction," said the IMF's chief economist Olivier Blanchard at a press briefing on Wednesday.

Still, many will be reluctant to cut spending if growth is weak, and there are risks in cutting spending too soon.

Dean Baker, co-director of the Center for Economic and Policy Research, said the greatest risk to the recovery is the push to austerity in much of Europe and even in the United States, as the end of the stimulus will be contractionary.

"This could very well upend an extremely weak recovery," he said.


Diane Swonk, chief economist at Mesirow Financial, said weakness in the U.S. housing market will impact the global recovery for some time to come, as the level of activity in this crucial sector of the world's largest economy will be so muted that it will hold down growth.

Indeed, the level of current housing sector activity is more consistent with a recession, she said.

A large chunk of the millions of American jobs lost in this recession have been in the construction industry, and the housing sector continues to be a major factor holding down employment, as it is not reviving enough to create a sufficient number of jobs, she said.


The IMF is also urging more coordination between developed and developing economies, as the two worlds are seeing very different levels of growth.

Blanchard said on Wednesday that demand in developed world nations remains weak, as people are saving more and spending less, while emerging economies are rebounding at a much faster clip.

The IMF forecasts sluggish growth for advanced economies, at 2. 7 percent for 2010 and 2.2 percent for 2011. For the Euro area, a 1.7 percent growth is forecast for this year and 1.5 percent for 2011.

But in emerging economies, consumption and investment are contributing to strong growth, which as a whole is forecast to reach 7.1 percent in 2010 and 6.4 percent for 2011, according to IMF statistics.

"Sustained, healthy recovery rests on two rebalancing acts: internal rebalancing, with a strengthening of private demand in advanced economies, allowing for fiscal consolidation; and external rebalancing, with an increase in net exports in deficit countries, such as the United States, and a decrease in net exports in surplus countries, notably emerging Asia," according to the World Economic Outlook.

Many interpret this to mean that a part of the IMF's push for a "rebalancing" should involve appreciating the Chinese Yuan.

But Chinese Premier Wen Jiabao on Wednesday urged European leaders in Brussels to refrain from pushing for a stronger Chinese currency.

"If the yuan is not stable, it will bring disaster to China and the world," he said in a speech. "I say to Europe's leaders: Don't join the chorus pressing to revalue the yuan."

"If we increase the yuan by 20 percent or 40 percent, as some people are calling for, many of our factories will shut down and society will be in turmoil," he said.

IMF Chief Dominique Strauss-Kahn on Friday urged nations not to succumb to a currency war.
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