Global recovery has begun - IMF

By Lesley Wroughton
ISTANBUL (Reuters) - The International Monetary Fund on Thursday declared that a global economic recovery had begun led by Asia, also cautioning that the strength of the rebound depends on a rebalancing of world growth.

After a year of being downbeat about prospects for the world economy, the IMF's latest World Economic Outlook revised up its forecasts, projecting a stronger rebound next year.

"The recovery has started. Financial markets are healing and in most countries growth will be positive for the rest of the year as well as in 2010," the IMF's chief economist Olivier Blanchard told a news conference before the start of World Bank and IMF meetings in Istanbul.

The Fund now expects world output to contract by 1.1 percent in 2009 before growing by 3.1 percent in 2010. This is more upbeat than its last outlook in July when the Fund projected the world economy would shrink 1.4 percent in 2009, before expanding 2.5 percent in 2010.

Blanchard said at his news conference that the strength of the world economy will depend on rebalancing global growth, an issue that was the focus of a summit of leaders from the Group of 20 advanced and developing nations in Pittsburgh last week.

"If you think about global rebalancing you realise it is going to have to come from a number of measures and from a number of adjustments. It is very hard to see how this could happen at the current exchange rates," he said.

"In general, it is very hard to see how global rebalancing does not come with an appreciation of Asian currencies of various degrees," he added, without mentioning China's currency, the yuan, which the IMF has said is substantially undervalued.

Rebalancing the world economy will require debt-laden countries including the United States to save more and buy less, and big exporters like China to increase domestic spending. Such a process would almost certainly require an even weaker U.S. dollar and for the Chinese renminbi to rise.

In an interview with Reuters Television, Blanchard also said that rebalancing global foreign exchange rates was not just about adjusting the level of the Chinese currency.

"I've focussed on China because it is an obvious component of the solution, but this is not a Chinese problem, it's a world problem," he added, declining to give specific levels for either the yuan or other currencies.

The IMF report said the global economy will take a while before it returns to pre-crisis levels, with growth expected to average a little more than 4 percent a year after 2010.

The Fund said it saw both the United States and the euro-area returning to positive, albeit slow, growth next year.

EMERGING COUNTRIES LEAD

Emerging and developing countries are the front runners in this recovery, expanding by 1.5 percent this year before rebounding 5 percent next year led by China and India, the IMF said, also noting signs of stabilization in Latin America.

The IMF revised up China's growth forecast for next year to 9 percent from a July estimate of 8.5 percent.

Overall, it said downside risks to growth are receding but are still a concern. The greatest risk was that countries disrupt the recovery by withdrawing supportive measures too soon.

It said governments should stand ready to roll out new initiatives if risks to growth materialise, even if it means racking up higher levels of debt.

But Blanchard said fiscal support could not go on forever and as governments consider exit strategies, they should also commit to large reductions in deficits.

The challenge going forward is to map a middle course between unwinding stimulus measures too early and leaving them there too long, which could damage government balance sheets.

"If the recovery was truly to falter, if private demand was really to pick up, and global rebalancing were not to take place, then this might be a very strong incentive for governments to have large fiscal deficits and run debt to very high levels," he added.

In major economies, authorities can still afford to maintain accommodative conditions for a while because inflation is likely to remain subdued, the IMF said.

In emerging markets, raising interest rates may happen sooner, the IMF said, although warned that in some countries warding off risks of new asset price bubbles may require greater exchange rate flexibility.

Meanwhile, a Turkish student, who is also the editor of a small left-wing newspaper Birgun, threw a shoe which landed at IMF Managing Director Dominique Strauss-Kahn's feet on Thursday as he made a speech to students in Istanbul.

The incident echoed that of an Iraqi journalist who last December hurled his shoes, a grave insult in the Muslim world, at then U.S. President George W. Bush.

(Additional reporting by Daren Butler, Nick Edwards and Selcuk Gokoluk; Editing by Andy Bruce/Victoria Main)
 
 
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