IMF Global Economic Outlook

Excerpt: IMF's Olivier Blanchard on whether the global economy can recover without additional stimulus programs. (1 min., 19 sec.)

HONG KONG, July 9, 2010 - The International Monetary Fund stands by its decision to raise the growth forecast for China to 10.5 percent for the year, up from 10 percent, despite recent measures announced by Beijing to cool the property market and subsequent indications that the economy was slowing down.

The IMF's chief economist Olivier Blanchard told the Asia Society Hong Kong Center that his China team was bullish about the country. "The argument is that they see basically strong growth in all the components of demand, therefore they are fairly optimistic and didn't change their numbers as a result," he said. "Who is right who is wrong we'll find out, but this forecast that we published is really based on the most recent information."

Blanchard reiterated the IMF's global outlook - released the previous day in Hong Kong - that "things are going reasonably well. Not just reasonably well, but better than forecast we last published in April. It's a fairly wide recovery across countries. If we didn't know about the ‘clouds' (Europe), if you just look at GDP numbers, we'd say it's not great but it's not bad."

Asian economies recovered strongly this year, driven by buoyant exports and stronger domestic demand, according to the IMF. It has raised the forecast for the region's growth to 7.5 per cent from 7 percent. However, Blanchard noted Europe remained a concern. "There are worries about banks in Europe, and this has led to worries about banks elsewhere. Europe is not alone. It is integrated with the rest of the world, so there are worries about other banks."

Blanchard noted that a recovery would have to come via a rebalancing of the world economy. "US growth is very much based on the old pattern of consumption demand and not the balanced growth we would like to see. In China, more rebalancing is happening. China needs to increase consumption. However in many countries that is not the issue. Investment is the issue - investment is low. It is clear rebalancing requires more focus on investment rather than consumption."

For China, Blanchard identified two major changes to drive the rebalancing. "I think you need to do two things. Change internal demand - both corporate and household. You do that, and change the composition of the demand with exchange rate appreciation to avoid overheating. Both are needed. You can't do it with just one. How to do both? That's the delicate part. You need to do it slowly as it involves structural reform, and it's clear that you can't go too fast on currency."

Blanchard concluded that changes in China's foreign exchange reserves had to be slow to avoid volatility in global markets. China reportedly bought a record $7.9 billion in short-term Japanese debt in May, a move analysts said was a sign of foreign reserves diversification into the yen and away from the euro and the dollar. "When you are a large investor, there is less margin for maneuver in changing your portfolio. When you have an investor the size of the PBOC then any change in portfolio changes the prices against you. Basically you need to go very, very slowly."

Reported by Penny Tang, Asia Society Hong Kong Center