Global recovery stronger with rising downside risks: IMF

08:18, April 12, 2011      

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The International Monetary Fund (IMF) said on Monday the global recovery is becoming stronger but soaring commodity prices and other concerns post rising downside risks to the world.

"The recovery is gaining strength," said the IMF in its latest World Economic Outlook report which kicked off the one-week-long programs of the IMF and World Bank Spring Meetings held here in Washington DC. "But downside risks have risen."

The 187-member institution said that earlier fears of a double- dip recession, which the IMF did not share, have not materialized.


According to the report, global recovery can be summarized in three numbers: the world economy to grow at about 4.4 percent a year in 2011, but with advanced economies growing at only about 2. 4 percent while emerging and developing economies grow at a much higher 6.5 percent.

For 2012, the IMF expects that the global output will grow by 4. 5 percent.

In advanced economies, the growth rate will slightly increase to 2.6 percent in 2012. "The hand-off from public to private demand is advancing, reducing concerns that diminishing fiscal policy support might cause a 'double-dip' recession. Financial conditions continue to improve, although they remain unusually fragile."

In the United States, the largest economy in the world, the housing market is still depressed, leading to anemic housing investment. The crisis itself has led to a dramatic deterioration in fiscal positions, forcing a shift to fiscal consolidation while not eliminating market worries about fiscal sustainability. And in many countries banks are struggling to achieve higher capital ratios in the face of increasing nonperforming loans. The problems of the European Union periphery, stemming from the combined interactions of low growth, fiscal woes, and financial pressures, are particularly acute. Reestablishing fiscal and financial sustainability in the face of low or negative growth and high interest rates is a substantial challenge.

In many emerging market and developing economies, demand remains robust, with output expected to grow by 6.5 percent in 2012, the same level as 2011.

The IMF said that "in emerging market economies, by contrast, the crisis left no lasting wounds. Their initial fiscal and financial positions were typically stronger, and the adverse effects of the crisis were more muted."


"Overall, with the recovery stronger on the one hand but oil supply growth lower on the other," noted the IMF's latest assessment of world economic prospects.

"New downside risks are building on account of commodity prices, notably for oil, and, relatedly, geopolitical uncertainty, as well as overheating and booming asset markets in emerging market economies." said the IMF.

IMF chief economist Olivier Blanchard said that there was no overwhelming threat to the global economy, but there were trouble spots that needed to be dealt with.

"The main worry was that in advanced economies, after an initial recovery driven by the inventory cycle and fiscal stimulus, growth would fizzle," said Blanchard. "The inventory cycle is now largely over and fiscal stimulus has turned to fiscal consolidation, but private demand has, for the most part, taken the baton."

In emerging market economies, overheating is a growing policy concern.

However, increasing prices "appear unlikely to derail the recovery," said Blanchard.

"Inflation may well be higher for some time but, as our forecasts suggest, we do not expect a major adverse effect on growth," he added.

Developing economies, particularly in sub-Saharan Africa, have also resumed fast and sustainable growth. Rising food and commodity prices pose a threat to poor households, adding to social and economic tensions, notably in the Middle East and North Africa. Oil price increases since January 2011 and information on supply, including on spare capacity, suggest that the disruptions so far would have only mild effects on economic activity.

A massive earthquake in Japan has exacted a terrible human toll. Its macroeconomic impact is projected to be limited, although uncertainty remains elevated.


Facing the uneven recovery among old and new concerns, world policy makers need to tackle the challenges accordingly, suggested the IMF.

For the advanced economies, the IMF called for continuing response, which include increased clarity on banks' balance sheet exposures and ready recapitalization plans if needed; smart fiscal consolidation that is neither too fast, which could kill growth, nor too slow, which would kill credibility; the redesign of financial regulation and supervision; and, especially in Europe, an increased focus on reforms to increase potential growth.

For the emerging market economies, response should be twofold: first, to rely on a combination of fiscal consolidation and higher interest rates to maintain output at potential and, second, to use macroprudential tools including, where needed, capital controls to avoid increases in systemic risk stemming from inflows.

"Overall, the macro policy agenda for the world economy remains the same but, with the passage of time, more urgent," said Blanchard.

"For the recovery to be sustained, advanced economies must achieve fiscal consolidation. To do this and to maintain growth, they need to rely more on external demand. Symmetrically, emerging market economies must rely less on external demand and more on domestic demand," he added.

Source: Xinhua
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