THE GLOBAL economic recovery has begun but sustaining it will require refocusing the United States toward exports and Asia toward imports, said the chief economist of the International Monetary Fund (IMF).
In an article released by the IMF yesterday, Olivier Blanchard also said potential economic output may be lower than it was before the financial crisis struck.
“The turnaround will not be simple,” Mr Blanchard said. “The crisis has left deep scars, which will affect both supply and demand for many years to come.”
US consumption, which accounts for about 70 per cent of the US economy and a large chunk of global demand, would not quickly return to pre-crisis strength, as households cope with trillions of dollars in losses from the housing and stock markets.
He said the financial crisis had made Americans more conscious of “tail risks” – events unlikely to occur but which, when they do, have devastating consequences.
That means US consumers are unlikely to return to their free-spending ways, and both the US and its trading partners will have to adjust. Emerging Asian countries, especially China, must play a big role.
“From the point of view of the US, a decrease in China’s current account surplus would help increase demand and sustain the US recovery,” he said. “That would result in more US imports which would help sustain world recovery.” But for China to boost domestic demand, it will need to provide a stronger social safety net and increase household access to credit.
In the short term, Mr Blanchard said most countries will see positive economic growth for the next few quarters.
Much of that growth is predicated on fiscal stimulus and inventory rebuilding, both of which will have to come to an end. “In nearly all countries, the costs of the crisis have added to the fiscal burden, and higher taxation is inevitable,” Mr Blanchard said. “All this means that we may not go back to the old growth path, that potential output may be lower than it was before the crisis.” If the rebalancing towards more US exports and more Asian imports fails, a weak US recovery would likely lead to intense political pressure to extend fiscal stimulus until private demand recovers.
If officials resist that pressure, the US recovery would be very slow, he said. If they bow to the pressure, high fiscal deficits may persist, leading to doubts about debt sustainability, US government bonds and the dollar.
– (Reuters)
