IMF says global economic recovery has begun

ISTANBUL (Reuters) – The International Monetary Fund on Thursday declared that a global economic recovery has begun led by Asia, also cautioning that the strength of the rebound depended on a rebalancing of global growth.

After a year of being downbeat about prospects for the world economy, the IMF’s latest World Economic Outlook revised up its growth forecasts for this year and next.

“The recovery has started. Financial markets are healing and in most countries growth will be positive for the rest of the year as well as in 2010,” the IMF’s chief economist Olivier Blanchard told a news conference here before the start of World Bank and IMF meetings.

The Fund now expects world output to contract by 1.1 percent in 2009 before growing by 3.1 percent in 2010. This is more upbeat than its last outlook in July when the Fund projected the world economy would shrink 1.4 percent in 2009, before expanding 2.5 percent in 2010.

Blanchard said at his news conference that the strength of the world economy will depend on rebalancing global growth, an issue that was the focus of a summit of leaders from the Group of 20 in Pittsburgh last week.

“If you think about global rebalancing you realize it is going to have to come from a number of measures and from a number of adjustments. It is very hard to see how this could happen at the current exchange rates,” he said.

“In general, it is very hard to see how global rebalancing does not come with an appreciation of Asian currencies of various degrees,” he added, without mentioning China’s currency, the yuan, which the IMF has said is substantially undervalued.

Rebalancing the world economy will require debt-laden countries including the United States to save more and buy less, and big exporters like China to increase domestic spending. Such a process would almost certainly require an even weaker U.S. dollar and for the Chinese renminbi to rise.

In an interview with Reuters Television, Blanchard also said that rebalancing global foreign exchange rates was not just about adjusting the level of the Chinese yuan.

“I’ve focused on China because it is an obvious component of the solution, but this is not a Chinese problem, it’s a world problem,” he added, declining to give specific levels for either the yuan or other currencies.

The IMF report said the world economy will take a while before it returns to pre-crisis levels, with growth expected to average a little more than 4 percent a year after 2010.

EMERGING COUNTRIES LEAD

Emerging and developing countries are clearly front runners in the recovery, expanding by 1.5 percent this year before rebounding 5 percent next year led by China and India, the IMF said, also noting signs of stabilization in Latin America.

The IMF revised up China’s growth forecast for next year to 9 percent from a July estimate of 8.5 percent. In Japan the economy is expected to recover by 1.7 percent next year, buoyed by fiscal and monetary stimulus measures.

The IMF urged policymakers not to disrupt the recovery by relaxing efforts to strengthen the financial sector and by prematurely withdrawing expansionary economic policies.

In major economies, authorities can still afford to maintain accommodative conditions for a while because inflation is likely to remain subdued, the IMF said.

The challenge going forward is to map a middle course between unwinding stimulus measures too early and leaving them there too long, which could damage government balance sheets.

In emerging markets, raising interest rates could happen sooner than in advanced economies, the IMF said, also warning that in some countries warding off risks of new asset price bubbles may require greater exchange rate flexibility.

Meanwhile, a Turkish student, who is also the editor of a small left-wing newspaper Birgun, threw a shoe which landed at IMF Managing Director Dominique Strauss-Kahn’s feet on Thursday as he made a speech to students in Istanbul.

The incident echoed that of an Iraqi journalist who last December hurled his shoes, a grave insult in the Muslim world, at then U.S. President George W. Bush.

(Additional reporting by Daren Butler, Nick Edwards and Selcuk Gokoluk, Editing by Andy Bruce)