Chief Economist at the International Monetary Fund (IMF) has stressed that the challenge for both advanced and emerging market countries is to go beyond the tune of structural reforms.
Olivier Blanchard made the statement at the World Economic Outlook Press Conference in Washington DC yesterday.
Mr Blanchard said the challenge for policy makers is to establish confidence through a clear plan to deal with both the legacies of the crises and the challenge of low potential growth.
“The challenge for both advanced and emerging market countries is to go beyond the general mantra of `structural reforms, to identify which reforms are most needed, which reforms are politically feasible,” Blanchard said.
He stressed that recovery has continued but is weak and uneven.
“You have now seen the basic numbers: We forecast world growth to be 3.3% in 2014, down
0.1% from our July forecast, and 3.8% in 2015, down 0.2% from our July forecast.
“This number hides however very different evolutions. Some countries have recovered or
nearly recovered. But others are still struggling,” Blanchard said
He said around the world, economies are subject to two main forces.
One from the past where countries have to deal with the legacies of the financial crisis, ranging from debt overhangs to high unemployment.
The other is one from the anticipated future where potential growth rates are being revised down, and the worse prospects are in turn affecting confidence, demand, and growth of today.
Blanchard said among advanced countries, the United States and the United Kingdom in particular are leaving the financial crisis behind and achieving decent growth, although potential growth is lower than it was in the early 2000s.
“Japan is growing, but high public debt inherited from the past, together with very low potential growth going forward, raises major macroeconomic and fiscal challenges.
“Growth in the euro area nearly stalled earlier this year, even in the core. While this reflects in part temporary factors, both legacies, primarily in the south, and low potential growth, nearly everywhere, are playing a role in slowing down the recovery,” Blanchard said
He added in emerging market economies, lower potential growth is the dominating factor.
“For emerging market economies as a whole, potential growth is now forecast to be 1.5% lower than it was in 2011.
“But, there again, differentiation is the rule: China is maintaining high growth, despite the end of a housing and a credit boom. Looking forward, rebalancing is likely to imply slightly lower growth, but this must be seen as a healthy development.
“India has recovered from its relative slump, and, thanks in part to policy and a renewal of confidence, growth is expected to exceed 5% again.
By contrast, uncertain investment prospects in Russia had already led to low growth before the Ukraine crisis, and the crisis has made it worse. Uncertain prospects and low investment, are also weighing on Brazil,” Blanchard added.
Adding low income developing countries continue to do remarkably well, and this despite a slowdown in commodity prices, growth rate forecasts are to be 6.1% in 2014, 6.5 in 2015.
However he warns downside risks are clearly present.
“The long period of low interest rates has led to some search for yield, and financial markets may be too complacent about the future. One should not overplay these risks, but, clearly, policy makers should be on the lookout.
“Macro prudential tools are the right instruments, but one has to worry that they may not be up to the task,” Blanchard added.
He said Geopolitical risks have become more relevant.
Adding so far, there is little evidence that Ukraine crisis has had measurable effects beyond the affected countries and their immediate neighbors.
“Nor has turmoil in the Middle East affected either the level or the volatility of energy prices very much. But, clearly, the risk that they do so in the future is there, and could affect the world economy in a major way.”
He said the third risk is a stalling of the recovery in the euro area, the risk that demand weakens further, and that low inflation turns into deflation. Adding if this happens, it would clearly be the major issue confronting the world economy that points to the issue of policy implications.
“With respect to legacies, while a major focus has been on improving bank balance sheets, debt overhang of firms and households remains an issue in a number of countries. So long as demand remains weak, monetary accommodation and low interest rates remain of the essence.”
By DANIEL NAMOSUAIA
