G20 growth forecasts don't add up
WASHINGTON (Reuters) - The world's major economies all seem to think their growth prospects are brightening. Some of them are bound to be disappointed.
The International Monetary Fund cautioned the Group of 20 against overconfidence this weekend after reviewing countries' forecasts for the next three to five years to see whether proposed policies would produce a stable mix of growth in rich and emerging economies.
"When we put the figures together, they're rather consistent, but they're rather optimistic," IMF Managing Director Dominique Strauss-Kahn said on Saturday. "And in our view, they may be a little too optimistic."
High unemployment and even higher government debt, the consequence of the deep recession and $5 trillion rescue, will drag on demand in most advanced economies, and they are all looking to growth abroad to take up the slack.
"What the IMF is worried about is how it all adds up," said Raghuram Rajan, an economics professor at the University of Chicago's Booth School of Business and a former IMF chief economist. "Everybody expects to grow and many of them expect to grow through exports."
Not everyone can.
Ending the boom-and-bust cycles that have plagued the world economy for the past 20 years will require some politically unpopular changes in advanced economies.
The United States must curb its debt-powered spending, which will slow economic growth. Europe must tackle labor market reforms that won't go down well with unions.
By expecting the rest of the world to drive demand, countries may be putting off these tough changes, Rajan said.
Output in advanced countries is now 7 percent below its pre-crisis trend, and the gap is expected to remain large for years, current IMF chief economist Olivier Blanchard said.
China, Brazil and India are growing fast and will gobble up a growing share of world production -- the IMF thinks emerging markets will grow 6.3 percent this year, nearly three times as fast as the advanced economies -- but their demand still won't be enough to fill that large gap.
Rajan said the G20 rich and emerging countries may have developed a false sense of security from their success in preventing the recession from becoming a depression.
The reform tasks they face now are much harder.
The IMF has warned for years that huge surpluses in export powerhouses such as China and towering deficits in countries including the United States could destabilize the economy.
Many economists think those imbalances contributed to the latest crisis because they fueled a credit explosion that inflated the U.S. housing bubble and also allowed businesses and governments to over-borrow at cheap interest rates.
Now that the United States and other advanced economies are straining their borrowing limits, some of that rebalancing is happening by necessity, if not force, as credit tightens and the interest rates actually charged in the everyday economy begin to rise.
Yet there is scant evidence that countries are prepared to voluntarily push policies that might be in the world economy's best interest but not immediately in their own.
At weekend G20 and IMF meetings, officials stressed that China stood to benefit from allowing its yuan currency to rise more rapidly, a hot-button issue for Beijing whose nearly $2.5 trillion reserve pile is the world's largest.
But when the tables are turned, rich countries have been cool to outside advice on steps they ought to take in order to make the global economy a safer place.
For example, some emerging markets have been inundated with investment money flowing in so fast that it threatens to overheat their economies.
The U.S. Federal Reserve could conceivably slow the flow by raising its benchmark interest rate from near zero, but Fed Chairman Ben Bernanke has scoffed at the suggestion that the U.S. central bank has a responsibility to address misalignments in other countries.
"Those countries have their own tools," Bernanke said in December.
'WE HAVE A PROBLEM'
The University of Chicago's Rajan said unpopular policy decisions are much easier to stomach in good times than in bad, so if countries neglected to act when the global economy was booming, they probably won't choose to now.
"How are you going to talk about labor market reform in Spain when you've got 20 percent unemployment?" he said.
The IMF faces a difficult task in convincing countries accustomed to dishing out advice to listen instead, he said, but there was some evidence the IMF's message had got through.
Bank of Canada Governor Mark Carney said G20 countries realized their growth targets collectively were not "credible," and that alone was a big step. More will be accomplished when G20 heads of state meet in Toronto in June, he predicted.
"As in many deep issues, the first sign of progress is recognizing you have a problem and I would say that the discussion around the table recognized that we have a problem," he said.