August 18, 2009: IMF Chief Economist: Global Recovery Is Beginning, But It May Take Years for Economy to Rebalance

“The global recession is now over and a recovery has begun,” says Olivier Blanchard, chief economist of the International Monetary Fund (IMF). However, he says, the global recession has not been typical, so neither will the economic revival be. Writing in an article released by the IMF, Blanchard states: “One should not expect very high growth rates in the recovery. The turnaround will not be simple. The crisis has left deep scars, which will affect both supply and demand for many years to come.” The word “recovery” has a precise technological meaning—that the economy is again growing but, essentially, has not returned to previous levels of output, wealth, and employment. In other words, the economy is healing, yet is not yet healed. According to Blanchard, “The recession has been so destructive that we may not go back to the old growth path [and] potential output may be lower than it was before the crisis.” Blanchard says that growth is coming for most countries, for at least the next few quarters, but will not be sturdy enough to decrease unemployment. He says growth is still dependent on fiscal and monetary government stimulus policies. “To sustain growth will require delicate rebalancing acts, both within and across countries,” he says. “Sustained recovery in the United States and elsewhere eventually requires rebalancing from public to private spending.” He also says that big fiscal deficits orchestrated to rouse the economy must be unwound. “The United States can’t rely on low interest rates to sustain the recovery, nor can it rely on consumer spending or investment filling the gap. Consumers are likely to save more in coming years. Businesses don’t need to invest much for the next few years, because so much of their capacity is idle. Sustained recovery is likely to require an increase in US net exports and a corresponding decrease in the rest of the world, coming mainly from Asia. China, for one, should increase its domestic demand,” he adds. [Marketwatch, 8/18/2009]