IMF Warns of East-West Growth Divide

The prospect of a world economy divided starkly between the slow-growing West and the dynamic emerging economies of the East was laid out in the latest World Economic Outlook, the International Monetary Fund's definitive report on the fortunes of the global economy.

"The global recovery is proceeding better than expected but at varying speeds – tepidly in many advanced economies and solidly in most emerging and developing economies," the IMF said yesterday.

The fund also warned of the social distress that could come from a prolonged period of unemployment – the feared "jobless recovery."

"As high unemployment persists in advanced economies, a major concern is that temporary joblessness will turn into long-term unemployment."

The UK, said the fund, would recover "moderately," though not as quickly as the IMF's economists judged last year, and much less quickly than Chancellor Alistair Darling has predicted. The IMF says that the UK will grow by 1.3 per cent this year and 2.5 per cent next, which would actually take the UK higher in the league table of advanced economies. But the difference between the IMF's forecast and the Government's central projection of 3.25 per cent growth has serious implications for unemployment and the public finances. Indeed, the IMF says that unemployment will increase to 8.3 per cent this year; the Office of National Statistics yesterday put the latest reading at 8 per cent.

The IMF's forecasts for world growth this year has been raised by 0.3 percentage points, to 4.2 per cent. However, there is a huge disparity between the established economies and the likes of China and India. While the US will grow by a relatively healthy 3.1 per cent this year and 2.6 per cent next – not so far removed from typical growth pre-crisis, the eurozone is stuck on 1 and 1.5 per cent and Japan on 1.9 and 2 per cent.

Overall, the advanced economies will expand by 2.3 and 2.4 per cent this year and next; respectable but less than might have been expected, said the IMF, given the scale of the slump.

By contrast, India will grow by more than 8 per cent this year and next, but even that breakneck pace will be outstripped by China – where a boost to annual national output of 10 per cent in 2010 and 9.9 per cent in 2011 is foreseen. In those economies, concerns centre more on inflation than unemployment.

Echoing its previous views, the IMF calls for rapid action to rein in spiralling government deficits: "The key task ahead is to reduce sovereign vulnerabilities. In many advanced economies, there is a pressing need to design and communicate credible medium-term fiscal consolidation strategies."

"If macroeconomic developments proceed as expected, most advanced economies should embark on fiscal consolidation in 2011. Meanwhile, given the still fragile recovery, the fiscal stimulus planned for 2010 should be fully implemented, except in economies that face large increases in risk premiums, where the urgency is greater and consolidation needs to begin now."

According to charts published by the IMF, the UK is categorised alongside Portugal, Ireland, Greece and Spain – the PIGS – and there is thus a hint that the IMF would like to see action on the UK deficit sooner rather than later. Memories of the last rescue of the UK by the IMF, in 1976, were revived by shadow Business Secretary Kenneth Clarke yesterday.

In terms of the argument between the US and China over the yuan and the need to reduce China's yawning trade surplus, the IMF urged both sides to reform. "The world's ability to sustain high growth over the medium term depends on rebalancing global demand. This means that economies that had excessive external deficits before the crisis need to consolidate their public finances in ways that limit damage to growth and demand." it said.

"Concurrently, economies that ran excessive current account surpluses will need to further increase domestic demand to sustain growth, as excessive deficit economies scale back their demand. As the currencies of economies with excessive deficits depreciate, those of surplus economies must logically appreciate."

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