By Babajide Komolafe
The two-speed global economic recovery of 2010  is likely to persist in 2011, with weak growth in advanced economies barely enough to bring down unemployment and emerging markets facing the challenges of success, including how to avoid overheating and handle strong capital inflows, the IMF’s Chief Economist, Olivier Blanchard, said.

In an assessment of the global economy at the end of 2010, and the prospects for 2011, Blanchard said that countries should continue to focus on rebalancing their economies in the coming year, including structural measures and exchange rate adjustments.

“Without this economic rebalancing, there will be no healthy recovery,” he told IMF Survey, the online magazine of the International Monetary Fund (IMF).

In an interview, Blanchard talked about the central role of the Group of Twenty (G-20) advanced and emerging market economies in helping during the global crisis and the need for continued cooperation to build on the recovery, as well as the prospects for both Europe and low-income countries.

Assessing the global economy in 2010, he said, “There were no major surprises. We had forecast positive but low growth in advanced economies, fast growth in emerging economies, and, lo and behold, this is how the year has turned out.  Indeed, I just went back and compared outcomes to our forecasts as of last January.

For advanced countries, we were right on the dot for the United States; things turned out a bit better than expected for core Europe; Japan had higher growth than we had anticipated, but it looks like a one-time phenomenon. As for emerging countries, we were right on the mark for China; India did better than we had forecast.”

Speaking further on the  two speed recovery he said, “To say that there were no major surprises, however, is not the same as saying that things are fine. They are not. The two-speed recovery, low in advanced countries, fast in emerging market countries, is striking and its features are increasingly stark.

They will probably dominate 2011, and beyond.   Emerging market countries were affected by the crisis through both trade and financial channels. The turnaround in trade has been nearly as sharp as the earlier collapse. But while trade has not yet fully recovered, most emerging market countries have been able to increase domestic demand so as to return to high growth.

In turn, their good performance has led capital flows to come back, in some cases, with much force. For many of these countries, the challenges are now how to avoid overheating and how to handle capital flows.  “The turnaround in trade has been nearly as sharp as the earlier collapse.”