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The Pain of Rebalancing Global Growth

Author: Martin Wolf, Distinguished Visiting Fellow for International Economics
October 9, 2013
Financial Times

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The world economy is like a see-saw. What was down comes up and what was up comes down. This creates new difficulties and new opportunities. But, overall, the story the International Monetary Fund tells in its latest World Economic Outlook is no disaster. Provided nothing bad happens – such as a US default – the world economy should now achieve somewhat more balanced growth.

In the fund's own words: "Activity in the major advanced economies has started to accelerate from subdued levels. By contrast, growth in China and many other emerging economies in Asia and Latin America, and to a lesser extent in the Commonwealth of Independent States, has cooled, after a surge in output beyond potential following the recovery from the Great Recession."

The overall picture presented, then, is one of a tricky rebalancing of the pattern of global growth: modestly improved dynamism in high-income economies, mainly the US, and reduced dynamism in a puzzlingly large number of emerging economies.

Where are the risks? There are a few obvious ones. What if progress in the eurozone turns out to be temporary? A backlash against austerity and high unemployment in vulnerable members is still quite possible. Meanwhile, progress towards a true banking union in the eurozone seems to have stalled.

A more immediate danger is a breakdown in US politics, leading to a huge disorderly tightening of fiscal policy or even a default on debt obligations. Yet another risk is that the unwinding of unconventional monetary policy and subsequent raising of interest rates prove chaotic. Some fear that inflation will suddenly explode in the high-income economies. This seems very unlikely.

In the high-income countries, a big danger arises from an excessively rapid pace of fiscal austerity, as has already been seen in the eurozone, the UK and, more recently, the US. One result has been inordinate reliance on monetary policy, often highly unconventional monetary policy, whose effects on the economy are at least as uncertain as those of fiscal stimulus. Future economists may wonder about our extraordinary belief in the efficacy of monetary policy during what is, quite clearly, a private sector savings glut.

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