In a report released Wednesday, the International Monetary Fund forecast the global economic recovery has started. It also noted, however, that sustained improvement will require continued structural changes to correct global imbalances.
The IMF said that Asia must be re-oriented toward increased consumption, while the United States needs to move toward exports,. IMF Chief Economist Olivier Blanchard also cautioned that potential economic output may be lower than it was before the global financial crisis. "The turnaround will not be simple," Blanchard wrote in the report. "The crisis has left deep scars, which will affect both supply and demand for many years to come."
According to the IMF, one reason for the likely reduced global output is America's new "frugal consumer" era. Consumption, which historically accounted for 60-65 percent of U.S. GDP, won't quickly return to pre-crisis levels, as Americans rebuild nest eggs devastated by the the stock and housing market sell-offs. Americans are also making up for a near-decade of unsustainable overconsumption, fueled in many cases by home equity loans and refinancings during the leveraging bubble. Further, the IMF predicted that the U.S. savings rate is also likely to remain at least at its current level, or at about five percent.
To compensate for the lower percent of U.S. consumption in the global economy, emerging markets must increase consumption and commercial activity, Blanchard said.
"Sustained recovery is likely to require an increase in U.S. net exports and a corresponding decrease in the rest of the world, coming mainly from Asia," Blanchard said. He added that China, in particular, should increase its domestic demand, "because it may well be in its own interest," to do so.
Many other emerging market countries should also decrease savings and allow their currencies to appreciate, which would reduce their current account surpluses, he added.
Turning to Europe, the IMF said the key correction concerns not a lowering of savings rates, but an increase in worker productivity. Germany is one nation that could improve its productivity, Blanchard said, which would increase demand on the European continent.
The IMF also noted that the fiscal stimulus, although critical to jump-starting national economies, must be replaced by private investment. The average ratio of debt-to-GDP, already high for most G-20 countries before the crisis, is forecast to exceed 100 percent in the next few years. On the other hand, as the IMF noted, emerging market countries, with generally lower public debt levels, have more leeway for deficit spending.
"Sustained recovery in the United States and elsewhere eventually requires rebalancing from public to private spending," Blanchard said. Large fiscal deficits designed to stimulate GDP growth must be unwound, he said, and replaced by demand. This can happen through either consumption or investment.
Part of the replacement of the stimulus will be, eventually, increased taxes. As Blanchard added, in nearly all countries, the cost of the financial crisis has added to the fiscal burden, and higher taxation is inevitable. The IMF noted that one way developed nations can limit the increased tax burden is by limiting the growth of entitlement program spending, including passing health care reforms. The group went on to point out that even a modest cut in the rate of growth of entitlement spending can substantially ease future fiscal burdens.
Economic Analysis: The IMF report highlighted the financial crisis' negative impact on lending institutions, the availability of credit, risk tolerance, and demand. In the process, it underscored what's needed to get the global economy moving again. Three tasks are critical for the recovery: 1) private spending must replace temporary public (fiscal stimulus) spending, 2) emerging markets must increase consumption to make-up for decreased consumption in the United States, and 3) U.S. exports must increase to help generate the revenue and earnings it needs to service and pay-down its debt, create jobs, and return the nation to healthy growth engine status.
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