IMF urges policymakers to take stronger action

By Sandrine Rastello
Thursday, October 7, 2010

High unemployment, public debt and fragile banking systems pose risks to global prosperity, the International Monetary Fund said Wednesday, urging policymakers to take bolder steps to ensure a sustained recovery.

The world economy will expand 4.2 percent next year, the Washington-based IMF said in a report, down from its forecast of 4.3 percent three months ago. The fund now projects growth of 4.8 percent this year, up from 4.6 percent.

Many advanced nations such as the United States 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 United States that are struggling to revive domestic demand, the IMF said. Developing nations will grow 6.4 percent next year, unchanged from the previous forecast, while advanced economies will expand 2.2 percent, down from an earlier 2.4 percent forecast, the IMF said.

The IMF cut the 2011 growth forecast for every Group of Seven industrial nation except Germany and France. It kept its forecast for France next year unchanged at 1.6 percent and raised Germany's to 2 percent from 1.6 percent.

The U.S. economy is forecast to grow 2.6 percent this year, down from an earlier forecast of 3.3 percent. Next year, the world's largest economy will grow 2.3 percent instead of 2.9 percent.

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.

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 United States relying more on exports, while developing nations turn to domestic sources of growth.

- Bloomberg News

© 2010 The Washington Post Company