The International Monetary Fund on Wednesday described the world economic recovery as unbalanced -- sluggish in advanced countries and much stronger in emerging and developing economies -- and said that the consumption and investment are key to even out the trend.
"The world economic recovery is proceeding, but it is an unbalanced recovery. It is sluggish in advanced countries and it is much stronger in emerging and developing economies," Blanchard, Director of the Research Department, which produces the World Economic Outlook told reporters.
"Over the last year or so, the main drivers of the recovery were inventory accumulation and fiscal stimulus. The first one is coming to a natural end and the second one is being slowly phased out. So, what has to happen is that consumption and investment must now take the lead," he said as the latest report of the World Economic Outlook was released here.
"Now, in most advanced countries, however, consumption and parts of investment are still weak and will remain so for some time. By contrast, in most emerging and developing economies, consumption investment is strong and, therefore, sustaining growth," he said.
Blanchard said the weakness of consumption and parts of investment in most advanced economies reflects both a correction of pre-crisis excesses, which have to be corrected and the scars of the crisis.
So, the US consumers who had ever borrowed before the crisis are now saving more and consuming less. This is good for the long run but it is a drag on demand in the short run, he noted.
"Weaknesses in the financial system are still constraining credit, a theme which was developed by the GFSR yesterday. Bottom line, this is what leads us to predict low growth for advanced countries.
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The relevant numbers are 2.7 per cent for 2010 and 2.2 per cent for 2011. With such low growth, we forecast that the unemployment rate will remain very high. The numbers here again are 9.6 per cent for the US in 2010 and 10 per cent for the euro (zone) also in 2011," the IMF official said.
By contrast, the IMF official said, in many emerging economies where excesses were limited and the scars of the crisis are few, consumption investments are contributing to strong growth. "In many of these countries, output is nearly back or already at potential. Our forecasts for emerging and developing countries as a whole are for 7.1 per cent for 2010 and 6.4 percent for 2011.
"If you turn to emerging Asia, we forecast growth in emerging Asia to reach 9.4 per cent this year and 8.4 per cent next year," he said.
Arguing that a more balanced recovery can be achieved, he said, that this requires two complex global rebalancing acts. "First, internal rebalancing: when private demand collapsed, fiscal stimulus helped reduce the fall in output, and that was very much needed. This helped avoid the worst.
"But private demand must now become strong enough to take the lead and sustain growth, while, fiscal stimulus gives way to fiscal consolidation. This is internal rebalancing. It has to be done in each country," Blanchard added.
"Many advanced countries, most notably the US, had to rely excessively on domestic demand before the crisis and they must now rely more on net exports. It is a question of sustaining growth for them.
"Many emerging countries, here most notably China, had relied excessively on net exports before the crisis and must now turn more to domestic demand. These re-adjustments are essential to maintaining a strong and balanced recovery," he argued.