IMF Research Director Outlines Challenges to Sustaining a Global Recovery

Recently, International Monetary Fund (IMF) Economic Counsellor and Director of Research Olivier Blanchard opined that a global economic recovery had commenced, but that sustaining it could require “delicate rebalancing” during which public fiscal stimulus spending is phased out and private demand replaces public demand, and during which large trade imbalances that had previously persisted moderate. In his assessment, Blanchard highlighted supply-side issues, demand-side issues, and risks associated with a failure to rebalance effectively.

A summary of those issues follows:

Supply-Side Issues:
• Partly dysfunctional financial systems in the advanced countries.
• Capital flows to developing countries that decreased may take a few years to fully recover.
• In nearly all countries, the costs of the crisis have exacerbated the fiscal burden and tax hikes may be necessary.

Demand-Side Issues:
• A return of economic growth in 2009 may not be sufficiently strong to reduce unemployment leading to a peak in the unemployment rate in 2010.
• Initial growth will depend mainly on inventory rebuilding and the fiscal stimulus, not private consumption and fixed investment spending. When the fiscal stimulus is unwound and inventory rebuilding is completed, rebalancing will be required to sustain economic growth.

Risks Associated With A Failure to Rebalance Effectively:
• An anemic U.S. recovery.
• Possible efforts to extend the fiscal stimulus. Premature phasing out of the stimulus would undermine economic growth. Extension of the stimulus could lead to concerns about U.S. debt, sparking large capital outflows from the U.S. and a potentially disorderly decline in the U.S. dollar. In turn, that additional instability or uncertainty concerning such instability could derail an economic recovery.

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