Sometimes I wish that the people of the IMF would be, well, more open. They do a great job assembling statistics and reports, but when I hear Oliver Blanchard at the press conference I don’t know what to think:
MR. BLANCHARD: Thank you, Bill. Good morning.
Let me start by giving you the main theme of this spring’s World Economic Outlook. The world economy is being pulled by two opposite forces: the first one is pulling the economy down; the second is pulling the economy up. For the time being, the first clearly dominates. Over time, with the right policies, the first force should become weaker, the second should become stronger, and this should lead to recovery, we think, starting early next year. Return to normal, however, will take much longer. So what I want to do is develop this theme in a bit more detail before taking your questions.
The first force, which originated with the financial crisis and was amplified by the collapse of confidence in demand that took place at the end of 2008, continues to pull the global economy down. The collapse of demand has led to sharp cutbacks in production and a dramatic decline in exports. Global GDP went down by an unprecedented 6 percent at an annual rate in the last quarter of 2008 and, as far as we can tell, most likely declined almost as fast in the first quarter of 2009. Be it through a decrease in their exports or through a decrease in the internal demand, now nearly all countries of the world are still suffering from the dynamic effects of that enormous shock.
The second force is pulling the world economy up. It reflects two factors: first, the natural stabilizing forces which typically are at work at some point in a recession, and the macroeconomic policies. Stabilizing forces typically include a turn-around in the housing markets, progress in reducing inventories, a recovery in the demand for durables, but it must be said that at this moment these forces are still weak at best.
Hmm. So there are two forces that change the course of the world economy. But what about the reasons why the first force is so strong this time? I think if we would understand what is happening (and what has happened), we could use the right macroeconomic policies to respond. I would wish that the IMF would provide more leadership on these questions. But then, Mr Blanchard seems to believe that the financial crisis has nothing to do with global imbalances. But, as Axel Leijonhufvud has correctly stated, greed was not invented yesterday.