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IMF sees bumpy recovery

IMF sees bumpy recovery
By Euronews
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The International Monetary Fund has trimmed its projections for global economic growth for this year and next.

It says that is to take into account sharp government spending cuts in the United States and Europe’s struggles with recession.

The IMF’s Chief Economist Olivier Blanchard said advanced economies face a bumpy road: “We have moved from a two-speed recovery to a three-speed recovery. Emerging market and developing economies are still going strong, but in advanced economies there appears to be a growing bifurcation between the United States and the euro area.”

The US get the strongest outlook – 1.9 percent this year rising to three percent next.

Japan’s predictions were much stronger than in January at 1.6 percent expansion this year and 1.4 percent in 2014, while the growth forecasts for the eurozone were cut with a deeper recession this year than previously seen at minus 0.3 percent. Growth in 2014 is predicted to be 1.1 percent.

The IMF warned Europe not to relax efforts to combat its debt crisis given Cyprus’ messy bailout and political stalemate in Italy and suggested a eurozone interest rate cut would help.

For more on the main economic challenges facing the world, euronews spoke to Carlo Cottarelli, Director of the IMF’s Fiscal Affairs Department.

Oleksandra Vakulina, euronews: “Very few European countries can be happy with their deficit positions, the three percent of GDP target is looking unreachable in the near term for many. Cutting debt means also reducing growth, how can government overcome that contradiction?”

Carlo Cottarelli: “That’s a difficult issue, fiscal austerity is a bit like a medicine, you have to take it, but if you take too much it is pretty bad, so you have to take it in the right amount; and that’s the struggle – a bit – that Europe is facing; to take the fiscal austerity medicine in the right amount. What we see is happening is that, in general, the pace of adjustment is the right one, but Europe needs to move a bit away from focusing on specific nominal targets. The 3 percent target has to be met, but does not have to be met in a specific year. Now on this, however, I have to say that I am actually encouraged by the fact that the European Union has actually shown quite a bit of flexibility in addressing specific cases, and allowing countries to slow down the pace of adjustment when necessary.”

euronews: “ In the US, you say that a sharp fiscal contraction has been avoided, but the politicians still can’t reach agreement on raising taxes and cutting spending. How can the US reduce its unsustainable debt, unless that is resolved?”

Cottarelli: “Something needs to be done, both on the spending and on the revenue side, in the medium term, unfortunately it has not yet been possible to reach an agreement, consensus in Congress, on a medium term fiscal adjustment plan. Although one has to keep in mind that even in the absence of a plan, fairly large cuts have been made, the deficit has been reduced quite a lot in the United States since 2009. It has dropped by more than six percentage points of GDP. If anything one can say that it is being cut too fast this year, the adjustment in the deficit is happening at a speed that is a bit too high compared to what is happening in the real economy in the US, the recovery is fairly fragile.”

euronews: “How much do you base your optimism on the fact that emerging markets and developing economies seem to have started to pick up?”

Cottarelli: “The world economy is proceeding at three different speeds, and the fastest speed is the one that is observed in emerging markets. Emerging markets were hit much less by the 2008/2009 crisis than advanced economies were. This has contributed to the fact that we now continue to see growth in these economies. We have also to keep in mind that this is just the process of catching up by these economies, with increased productivity growth in those countries, and some growth also in employment in those countries. So we think that this process is going to continue and emerging economies will continue to rise at a pretty fast pace in the medium term.”

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