IMF says world economy is recovering

By Chris Giles in Istanbul

Published: October 1 2009 07:34

A recovery in the world economy is now under way, the International Monetary Fund said on Thursday, but it warned there were many obstacles to sustained rapid growth.

Publishing its twice-yearly World Economic Outlook, the IMF rejected forecasts for either a rapid V-shaped recovery or a double-dip recession, saying the recovery will most likely be “weak by historical standards”.

The IMF is no more optimistic about the medium-term outlook, insisting that growth prospects depend on resolving two difficult challenges: the weaknesses in the global banking system; and the persistent unwillingness of countries with large trade surpluses to boost domestic demand and become motors of world growth.

The economic crisis, which resulted in the deepest global recession since the second world war, has led to a permanent loss of output, the IMF said. Most economies now have a large amount of spare capacity which is likely to keep inflation low, in spite of the extraordinarily expansionary monetary and fiscal policies undertaken by central banks and governments around the world.

But for the first time in more than a year, the IMF’s premier economic declarations have not become more gloomy. It has revised higher its forecasts for world growth, reflecting its view that there was now a much lower risk of the recession turning into something even nastier. “Strong public policies across advanced and many emerging economies have supported demand and all but eliminated fears of a global depression,” the World Economic Outlook said.

The IMF forecast that world economic output would rise by 3.1 per cent in 2010 after contracting by 1.1 per cent in 2009, an upward revision of 0.6 percentage points for 2010 from its most recent forecast in July.

Emerging economies will grow much more quickly than advanced economies, the IMF says, with growth averaging 5.1 per cent in the emerging world, even including the troubled central and eastern European regions, and only 1.3 per cent in rich countries. Central banks of rapidly growing emerging markets might have to raise interest rates soon.

Dominique Strauss-Kahn has become the latest target of the shoe-throwing protest technique pioneered against George W. Bush as he arrived in Istanbul to launch the International Monetary Fund’s annual meetings.

The Fund’s managing director was addressing students on the campus of Bilgi University when a student took aim with a white trainer, chanting “get out of the university, thief IMF.”
Television footage showed security guards shielding Mr Strauss-Kahn and hustling the bearded student, who wore a white t-shirt and sleeveless jacket, out of the room.

Mr Strauss-Kahn later shrugged off the protest. ”It is important for us to have an open debate. I was glad to meet students and hear their views. This is what the IMF needs to do, even if not everyone agrees with us, one thing I learned, Turkish students are polite. They waited until the end to complain”, he told reporters.

In the short-run, the IMF believes the recovery will be sluggish because “the policy forces that are driving the current rebound will gradually lose strength, and the real and financial forces remain weak”.

Unemployment is forecast to keep rising across developed economies, so the recovery will feel “jobless” in most countries. And because companies have clung on to workers during this recession more than in the past, the chances of a rapid pick-up in employment are minimal, the IMF says.

Governments are running out of room due to surging budget deficits, but the IMF warns against any sudden reversal of ultra-low interest rates, tax cuts and public spending increases in rich countries. “Premature exit from accommodative monetary and fiscal policies is a particular concern because the policy-induced rebound might be mistaken for the beginning of a strong recovery,” the report said.

For the medium term, the IMF has taken an aggressive stance on global trade imbalances, warning that the recent reduction in the US trade deficit and associated surpluses in China, Japan, Germany and oil exporters is temporary. It said: “Many economies that have followed export-led growth strategies and have run current account surpluses will need to rely more on domestic demand – notably emerging economies in Asia and elsewhere and Germany and Japan.”

Such language will not be popular in surplus countries, which argue they are not to blame for producing goods others want to buy. Axel Weber, the Bundesbank president, insisted on Tuesday that recommendations for Germany to reduce its surplus have no place in international discussions. “This is not something policy should target or can target. It would mean intervening against optimal structures that have developed in a free market environment,” he told reporters during an economic seminar in Sweden.

Copyright The Financial Times Limited