The global economic recovery has begun but sustaining it will require refocusing the US toward exports and Asia toward imports, the International Monetary Fund's chief economist said.
'The recovery has started. Sustaining it will require delicate rebalancing acts, both within and across countries," Blanchard said in an IMF article today, released in advance of publication tomorrow.
Blanchard cautioned that predictable models based on past recoveries from recessions would not apply to the worst global slump in seven decades.
'The world is not in a run-of-the mill recession. The turnaround will not be simple. The crisis has left deep scars, which will affect both supply and demand for many years to come,' he said.
The economist said that US consumption, which accounts for about 70% of the US economy and a large chunk of global demand, would not quickly return to pre-crisis strength as households cope with trillions of dollars in losses from the falling housing and stock markets.
He said the financial crisis had made Americans more conscious of 'tail risks' - events that are unlikely to occur, but when they do have devastating consequences.
That means US consumers are unlikely to return to their free-spending ways, and both the US and its trading partners will have to adjust. Emerging Asian countries, especially China, must play a big role.
'From the point of view of the United States, a decrease in China's current account surplus would help increase demand and sustain the US recovery,' he said. 'That would result in more US imports which would help sustain world recovery,' he added.
But in order for China to boost domestic demand, it will need to provide a stronger social safety net and increase household access to credit, which will encourage its consumers to save less and spend more.
