WASHINGTON, Oct 6 – Rich and emerging economies must better balance trade or risk scuttling the global economic recovery, the International Monetary Fund warned on Wednesday, as it urged reform.
In its latest economic outlook the IMF said growth would slow more than previously expected in 2011, as the United States, Europe and Japan continue to struggle and China remains overly dependent on exports.
The recovery is "neither strong nor balanced and runs the risk of not being sustained," warned Olivier Blanchard, the IMF\’s chief economist.
Painting a picture of a faltering developed world — where business is still struggling to pick up where government crisis spending left off — the IMF predicted global growth would be limited to 4.2 percent next year.
That is less than the 4.8 percent growth expected this year and 0.2 points below the IMF\’s previous forecast for 2011.
While restocking had helped growth the United States, Japan and some parts of Europe, the IMF said advanced economies were still reliant on dwindling government spending.
"For the past year or so, inventory accumulation and fiscal stimulus were driving the recovery. The first is coming to an end. The second is slowly being phased out."
While the IMF recommended some central banks continue their ultra-loose monetary policies, it warned the impact would be limited, and increased exports must take up the slack.
"Not much more can be done, and one should not expect too much from further quantitative or credit easing."
It also warned that rich countries, many of which are heavily in debt, would have to trim spending and balance their books in the medium term.
"Fiscal stimulus has to eventually give way to fiscal consolidation, and private demand must be strong enough to take the lead and sustain growth."
There was a particular warning for Europe, with "severe external financing constraints" forecast for debt-laden Greece, Ireland, Portugal and Spain.
The picture could not be more different for emerging markets like India and China, where growth continues, but is limited by an over-dependence on exports to Europe, Japan and the United States that must be addressed.
"Emerging market economies with large current account surpluses must accelerate rebalancing. This is not only in the world economy\’s interest, but also in their own."
Wading into sensitive political waters, the IMF said China must allow its currency to strengthen to boost domestic demand and reduce its reliance on exports.
"To the extent that a stronger Chinese currency eases this process, other surplus countries in the region could follow suit, which would facilitate the needed shift towards domestic sources of growth," the IMF said.
Emerging markets are expected to expand at a rate of 7.1 percent this year and 6.4 percent in 2011.
Advanced economies are expected to grow at a slower rate of 2.7 percent and 2.2 percent next year.