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News & Events

Not out of the woods yet

IMF chief economist Olivier Blanchard sees ‘dismal’ growth for advanced economies — but a few bright spots elsewhere

By Cheryl SooHoo

5/8/2012 - What happens in Vegas isn’t staying in Vegas when it comes to the global economy. 

IMF chief economist Olivier Blanchard

Even the most obvious fixes won't jumpstart the world economy, IMF chief economist Olivier Blanchard said. Fiscal consolidation, bank deleveraging and mortgage defaults are all putting a damper on economic growth.
No matter who started what where, high public debt, tight credit, and the reverberations of the housing bust are affecting the recovery of nations around the world.

“Our forecast is for low growth with very substantial risks,” said Olivier Blanchard, economic counsellor and director of research at the International Monetary Fund (IMF) in Washington. Invited to speak at the April 30 Susan Bies Lecture on Economics and Public Policy, the macroeconomist gave Kellogg students the IMF’s big-picture view of today’s fragile world markets.

Predicting 2.1 percent growth for the United States and -0.3 for the Euro area in 2012, Blanchard described the numbers for advanced countries as “dismal.” Europe, in particular, is teetering on the edge of another recession. Meanwhile, emerging Asian and Latin American markets, dependent on the economic vitality of more developed nations, have experienced a slowdown in exports. But nations such as China, with a predicted growth rate of 8.2 percent, and sub-Saharan Africa, with a predicted growth rate of 5.4 percent, “are doing just fine,” Blanchard said.

Changes ahead
Achieving financial stability, high employment, and robust international trade will require policy changes. But even some of the most obvious fixes won’t jumpstart the global economy. Blanchard described three major “brakes” hindering growth:

Fiscal consolidation. While necessary to achieve favorable debt-to-GDP ratios, this fiscal policy weighs on growth by reducing spending and increasing taxes. Blanchard said the IMF recommends a steady approach without enormous adjustments.

Bank deleveraging. Banks need to pay off debt, but this is resulting in a credit crunch for households and firms, especially in Europe. “From the point of view of the bank, deleveraging is great,” said Blanchard, “but for the economy, not so great.”

Foreclosures. Mortgage defaults continue to put a damper on housing prices and investment, particularly in the United States.

As various nations address individual fiscal woes, the IMF announced in late April that it has raised $430 billion to build a stronger global firewall against further financial crises. The increased resources almost double the organization’s lending capacity.

“With what we’ve raised, we think we can handle the next most-likely crisis,” said Blanchard. “But we aren’t out of the woods at all.”

The Susan Bies Lecture on Economics and Public Policy was launched in 2008 in honor of Susan Schmidt Bies, who earned her doctorate in economics at Northwestern in 1972. She served on the Board of Governors of the Federal Reserve System from 2001-07.