High unemployment, public debt and fragile banking systems pose risks to global prosperity, the International Monetary Fund has said, urging policy makers to take bolder steps to assure a sustained recovery.
The world economy will expand 4.2 per cent next year, the Washington-based IMF said in a report, down from its forecast of 4.3 per cent three months ago. The fund projects growth of 4.8 per cent this year, up from 4.6 per cent.
Many advanced nations such as the US have yet to adopt policies that will reduce their reliance on government spending and strengthen household demand and exports, the IMF said. At the same time, developing nations such as China are keeping their currencies weak and remain overly dependent on overseas sales to spur growth.
“The result is a recovery that is neither strong nor balanced and runs the risk of not being sustained,” chief economist Olivier Blanchard wrote in an introduction to the IMF’s World Economic Outlook. “If growth stops in advanced economies, emerging-market economies will have a hard time decoupling,” he said. Global coordination “may be even more important today than at the peak of the crisis.”
Nations such as China and Brazil are powering the return to growth, widening a gap with advanced economies from Europe to the US that are struggling to revive domestic demand, the IMF said. Developing nations will grow 6.4 per cent next year, unchanged from the previous forecast, while advanced economies will expand 2.2 per cent, down from an earlier 2.4 per cent forecast, the IMF said.
The fund urged emerging economies to allow greater exchange-rate flexibility, while their developed counterparts should reduce deficits, step up financial repair and keep accommodative monetary policies in place.
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Such steps are part of two “rebalancing acts” needed to assure a sustained recovery, the IMF said. One entails a shift from public stimulus to private demand in developed countries. The second involves an external shift, with countries such as the US relying more on exports, while developing nations turn to domestic sources of growth.
“Many emerging-market economies continue to run large current-account surpluses and to respond to capital inflows primarily through reserve accumulation rather than exchange-rate appreciation,” Blanchard wrote. “International reserves are higher than they have ever been and continue to increase.”
Japan last month sold the yen for the first time in six years to spur exports and growth, joining countries across Asia and Latin America that have tempered gains in their currencies against the dollar. Brazil’s Finance Minister Guido Mantega warned September 27 of a “currency war” and said that his government will buy all “excess dollars” in the market to curb the real’s appreciation.
Both the euro and the yen are “broadly in line with medium-term fundamentals,” the IMF said, while the dollar is “on the strong side.”
“With a few exceptions,” emerging Asian currencies, including China’s yuan, “appreciated modestly in real effective terms,” with many remaining “undervalued relative to medium- term fundamentals,” IMF economists said.
US Treasury Secretary Timothy Geithner said last month that the pace of the yuan appreciation has been “too slow.” Last week, he played down the danger of a trade war over China’s currency policy after the US House of Representatives approved a bill letting companies seek compensation for imports from countries with misaligned exchange rates.
Risks to financial stability increased over the past six months because of the European debt crisis that started in Greece, even though market conditions have eased in the past few months, the IMF said.
It warned that without “strong” and “credible” fiscal tightening plans over the next few years, debt markets will continue to threaten the recovery.
The IMF, which over the past 18 months has shored up economies from Greece to Ukraine, also warned that housing will remain a “drag on growth” in many parts of the world as well as a risk to lenders.
“Sluggish” growth in most advanced economies means that unemployment will stay high, which “poses major social challenges” and will contribute to low inflation.
Monetary policy “wherever private demand is weak” should continue being “accommodative,” Blanchard wrote, while cautioning that “not much more can be done, and one should not expect too much from further quantitative or credit easing.”
Among major emerging markets, the fastest growth will be in China, which this year overtook Japan as the world’s second- largest economy.
Inflation in emerging economies should reach about 5 per cent next year, the IMF estimated.
“Central banks in emerging and developing economies must be alert to second-round effects on wages from higher food prices or upside surprises to energy prices,” it said.
Still, while demand should continue to support commodity prices, the IMF expects price pressures to remain “moderate” and to “be balanced by other forces” such as moderating growth in China.