WASHINGTON—The world economic recovery is set to continue over the next two years and will not be derailed by the earthquake in Japan or the surge in commodity prices, according to the results of the latest global checkup released by the International Monetary Fund (IMF) on Monday.
The world economy is set to grow at a 4.4-percent rate in 2011, down slightly from the 5-percent rate in 2010. Growth will accelerate slightly to a 4.5-percent rate in 2012.
In the US growth will stay at 2.8 percent this year before accelerating to 2.9 percent next year.
Fears that higher commodity prices will lead to 1970s-style stagflation are overblown, the IMF said.
“Inflation may well be higher for some time but...we do not expect a major adverse effect on growth,” the IMF said. The macroeconomic impact from the earthquake in Japan is also expected to be limited.
Overall, the downside risks to economic growth have risen, the agency said in its biannual World Economic Outlook. Additional disruptions to oil supplies would be a concern.
The “two-speed” global recovery remains firmly in place, with advanced economies lagging behind emerging and developing market economies. Advanced countries are likely to grow at about a 2.4-percent rate over the next year while the emerging economies expand at a much higher 6.5-percent rate. Over the next two years, the Group of 7 leading nations must cut deficits, the report said. In order to still grow, they must sell products overseas. Symmetrically, the emerging market economies must rely less on demand in the G-7 countries and more on their own domestic demand, the IMF said. The US is hampered by its anemic housing sector. Unemployment is high and is expected to remain so “for many years to come.”
The European Union must reform in ways that increase its low rate of growth in potential output.
Addressing the problems of the European Union periphery is very hard w hen growth is very low, the IMF said.
“Smart” fiscal consolidation is needed that is neither too fast, which could kill growth, or too slow, which would kill credibility, the IMF said.
In emerging market economies, the challenge is to avoid overheating.
“Many emerging market economies cannot afford to delay additional policy tightening until the advanced economies undertake such tightening themselves,” the IMF said. Appreciation of currencies should not be resisted by emerging economies.
The international financial institution often plays the role of schoolmaster for policy makers around the world, and the to-do list in Monday’s report was impressive.
The IMF also detected some flagging interest from its pupils now that the sun was shining and the global financial crisis is past its peak.
“The imperative for action and willingness to cooperate among policymakers is diminishing,” the report concluded.The US must reduce its deficit to stem the risk of “globally destabilizing changes in bond markets,” the report said. China must remove distortions that force high levels of consumer savings. And the two countries should not point fingers at each other.
“Insufficient progress on one front should not serve as an excuse for inaction on the other front,” the IMF said. The immediate task for Japan is to support reconstruction but once the size of the damage is better understood, the country must develop a strategy to lower the public debt-to-GDP ratio.
In Europe what is needed is “greater trust” in the health of the banking sector. Overall, the reform of the global financial system “remains very much a work in progress,” the IMF said.
