By Agency Reporter

Monday, 3 Jan 2011

A two-speed global recovery will extend into 2011, with developed countries growing slowly while emerging-market economies power ahead, the International Monetary Fund has predicted.

In an interview with the lender‘s online magazine, IMF Survey, Chief Economist, IMF, Mr. Olivier Blanchard, said the necessity for countries to rebalance their economies by letting exchange rates adjust more freely while taking steps to control debt remains vital.

”Without this global rebalancing, there will be no healthy recovery,” he said.

The IMF has been calling for countries like the United States that relied on consumer spending for past growth to save and invest more, and for export-reliant countries like China to encourage more consumption at home.

China has piled up huge surpluses on trade by selling goods cheaply in US and European markets, drawing complaints that it deliberately keeps its yuan currency undervalued to gain an unfair advantage.

Blanchard did not mention China by name but left no doubt that he believes Beijing needs to let its yuan appreciate more freely than it has done as its economic might increases.

”Rebalancing is a complex process. No single measure, no one country holds the solution on its own,” he said, adding that, ”But exchange rate adjustment is an integral part of the process.”

Blanchard said several European countries faced a difficult period of adjustment and added that they likely would have found themselves in trouble even if the 2007-2009 financial crisis had been averted.

”They had, based on what turned out to be unduly optimistic expectations, increased domestic demand excessively, and some had run very large current account deficits,” he said.

Greece and Ireland are now receiving bail-outs from the European Union and IMF and they, among others, are having to make structural adjustments to get debts under control.

”For those countries in the euro and thus operating under a fixed exchange rate, this is going to be a long and tough slog,” Blanchard cautioned.

Source: Punch