"Two-speed" global economic recovery

The world is undergoing what has been described as a “two-speed” economic recovery. In a new report on the global economic situation, the International Monetary Fund says advanced economies are emerging slowly from the worst recession since the Great Depression, while the economies of emerging markets and even some low-income countries are relatively buoyant. However, unemployment is a key issue which is likely to trouble many countries. The IMF’s chief economist is Olivier Blanchard. He’s been speaking to Camilla Andersen.

MR. BLANCHARD: The world economy is recovering, but it is a two-speed recovery. If you look at emerging market countries, they have been going very fast. We expect them to go about as fast next year, not quite. And also, they’re getting to the point where they’re getting back to full potential, so the main issue for them is now overheating rather than anything else. If you look at advanced countries, then the growth is much slower, much lower. They still have a large output gap, which they need to make up, so unemployment is still very high. And our forecast is that next year growth will be roughly the same as this year. That’s not going to be able to make a big dent to unemployment.

MS. ANDERSEN: You mention unemployment. What are the other issues that are likely to dominate in 2011?

MR. BLANCHARD: I see two issues. The first one is capital flows to emerging market countries, and that’s a combination of the fact that the countries are doing well, so their growth prospects are very good, and the fact that interest rates in advanced countries are not so high, are very low, so there’s a strong incentive to take your funds to emerging market countries.

Capital flows are both a blessing and potentially a curse. And they are a blessing because you can borrow cheaper from the rest of the world, which can’t be bad, but either they come too fast or in the wrong form. They can be difficult to handle. And so I think the main challenge for the emerging market countries next year is going to be how to avoid overheating, handle these capital flows. The issue confronting advanced economies is a fiscal one. The crisis really has created a large fiscal hole, large debt, large deficits, and these have to be slowly eliminated or reduced. That’s going to take a long time. And you can’t do it too quick because if you did it too quick, you would kill growth. You can’t do it too slow. I think the key there is to put in place a medium-term plan, something which over 5 or 10 years gets you there, make it in a credible fashion, and some countries are not there yet. That’s going to be their challenge.

MS. ANDERSEN: Going back to developing countries, what is the outlook, in particular for Africa, which has been doing rather well lately?

MR. BLANCHARD: Right, Africa has done well, but it suffered less from the crisis than many other countries. And last year, they had a growth rate, if you take Sub-Saharan Africa, of more than 5 percent and we predict it’s going to be roughly the same thing next year. That’s a combination of high commodity prices, but it’s more than that. I mean, they actually have taken the right macro decisions in general, used macro policy right, and so the result is fairly strong growth. If there was a challenge I think it is infrastructure, which is still very poor. Now that they have more access to international capital markets that’s an opportunity they could use to actually use it in order to invest in infrastructure. The danger there is to do it right, not to waste the money, and not to get into the debt prongs that they went through in past decades.

duration: 2’46″

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