| Going into the last week’s International Monetary Fund (IMF)/World Bank fall meetings in Washington, D.C., dominated by the rising concerns over a possible “currency war,” primarily between the United States and China, the IMF released its two flagship biannual reports, World Economic Outlook (WEO) and the Global Financial Stability Report (GFSR). | |
| These reports were overshadowed in the financial media by the controversy swirling around China’s allegedly undervalued renminbi. Dominique Strauss-Kahn, the managing director of the IMF, in whose governance China is grossly underrepresented, struggled unsuccessfully to arbitrate this controversy. The G-7 finance ministers met on the sidelines to discuss it, but without the inclusion of China they could accomplish nothing. It seems that only the G-20 summit on Nov. 11-12 Seoul, South Korea, might have a chance to resolve the escalating dispute through a multilateral currency pact. The WEO, which analyzes and projects global economic developments, is titled “Recovery, Risk, and Rebalancing.” The GFSR, which assesses developments in global financial markets, focusing on how the financial system functions, and how to cope with the forces that can destabilize it, is titled “Sovereigns, Funding, and Systemic Liquidity.” The first two chapters of the 238-page WEO report, Chapter 1: “Global Prospects and Policies” and Chapter 2: “Country and Regional Perspectives,” present macroeconomic projections and review the economic outlook summarized as “a recovery that is neither strong nor balanced and runs the risk of not being sustained.” These two chapters, which note the fragility and unevenness of global economic recovery from the Great Recession, emphasize the urgent need for faster “internal balancing” of demand from the public to the private sector, meaning more consumer and business spending and less government expenditures, and for speedier “external balancing” from current account deficit countries, such as the United States, that should save more and increase net exports, to surplus countries, such as China, that should save less and decrease net exports. Although the WEO report does not expect a global double-dip recession, it emphasizes the downside risks to the fragile economic rebound and warns that “the financial sector remains the Achilles’ heel of the recovery,” as discussed in detail by the GFSR. The IMF forecasts world real output, which contracted by 0.6 percent in 2009, to expand, year-over-year, by 4.8 percent in 2010 and 4.2 percent in 2011, and, Q4-over-Q4, by 4.3 percent in 2010 and 4.4 percent in 2011. The lower projections for advanced economies are: year-over-year, by 2.7 percent in 2010 and 2.2 percent in 2011, and, Q4-over-Q4, by 2.4 percent in 2010 and 2.5 percent in 2011. The higher projections for emerging and developing economies are: year-over-year, by 7.1 percent in 2010 and 6.4 percent in 2011, and, Q4-over-Q4, by 7.0 percent in both 2010 and 2011. Consumer prices in advanced economies, which rose annually at only 0.1 percent in 2009, are projected to increase at 1.4 percent in 2010 and 1.3 percent in 2011; those in emerging and developing economies, which rose at 5.2 percent in 2009, are projected to increase at 6.2 percent in 2010 and 5.2 percent in 2011. So, the WEO does not forecast deflation even in advanced countries, except Japan, although it stresses that “deflation rather than high inflation is the more pertinent risk” because of the predominantly downside risks to the one-year-old fragile recovery. The unemployment rate in advanced economies, at 8.0 percent in 2009, is projected at 8.3 percent in 2010 and 8.2 percent in 2011. In summary, advanced economies, especially the United States, the epicenter of the global financial crisis, are facing sluggish recovery and stubbornly high chronic unemployment, posing major social challenges, whereas emerging and developing economies, affected only indirectly by the global financial crisis, are recovering rapidly. The volume of world trade in goods and services, which contracted at -11.0 percent in 2009, is projected to expand at 11.4 percent in 2010 and 7.0 percent in 2011, but it could suffer a devastating blow from contagious protectionism that could result from a possible global “currency war.” In Chapter 2 the WEO forecasts Turkey’s real gross domestic product (GDP), which contracted by 4.7 percent in 2009, to expand by 7.8 percent in 2010, 3.6 percent in 2011 and 4.0 percent in 2015. Turkish consumer prices, which rose annually at 6.3 percent in 2009, are projected to rise annually at 8.7 percent in 2010, 5.7 percent in 2011, and 4.0 percent in 2015. The current account deficit as percentage of GDP, at -2.3 percent in 2009, is forecast to jump to -5.2 percent in 2010, -5.4 percent in 2011, and -6.2 percent in 2015. But the unemployment rate, at 14.0 percent in 2009, is projected to drop to 11.0 percent in 2010 and 10.7 percent in 2011. The last two WEO chapters, Chapter 3: “Will It Hurt? Macroeconomic Effects of Fiscal Consolidation” and Chapter 4: “Do Financial Crises Have Lasting Effects on Trade?” focus on two special topics of critical importance. Chapter 2 examines the complex and especially controversial short-term effects of fiscal consolidation, i.e., government expenditure cuts and tax hikes, on economic activity, based on the analysis of fiscal consolidation in advanced economies over the last three decades as well as simulations of the IMF’s Global Integrated Monetary and Fiscal Model. Its major findings are: (1) Fiscal consolidation, likely to be beneficial in the long-run, leads to lower output and higher unemployment in the short-run, especially if they are not offset by looser domestic monetary policies and currency real depreciation; (2) Government spending cuts, especially in government transfers, have smaller contractionary effects than tax hikes; and (3) Fiscal consolidation in countries confronting greater risk of perceived sovereign default tends to be less contractionary. These findings suggest that simultaneous budget deficit cuts across many countries are likely to hurt more than those sporadic ones in a few countries. Reflecting the concern with the “Great Trade Collapse” between late 2008 and early 2009, Chapter 4 examines the effects of 169 episodes of banking and debt crises over the last four decades on international trade in individual countries. Its major finding is that although exports are relatively unaffected, experiencing a rather small and gradual decline, imports plummet in the first two years after a financial crisis, remaining depressed below pre-crisis levels even over the medium term. This result has negative implications for developing countries that rely on exports to advanced countries in which the banking and debt crises have been concentrated. It supports Turkey’s timely continuing efforts to diversify its export markets beyond the EU. In next week’s column, I will discuss the GFSR, exploring why the WEO warns that “the financial sector remains the Achilles’ heel of the recovery.” | |
| 11.10.2010 | |
| Columnists | |
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