Zhu: Global economy will not see double dip

Zhu Min, a Chinese economist and deputy managing director of the International Monetary Fund, struck an optimistic note on the first day of the Summer Davos forum in Dalian on Wednesday, predicting the global economy will avert a second slide into recession. [Photo/Xu Xun]

The world economy will probably avert a dreaded double-dip recession, despite increased uncertainty and volatility as Europe tackles its sovereign debt crisis, Zhu Min, deputy managing director of the International Monetary Fund, said Wednesday.

Speaking at the first day of the Summer Davos forum in the northeastern port city of Dalian, China, Zhu said that although markets have lowered global growth expectations – Standard and Poor's cut its U.S. growth outlook for this year from 2.4 percent to 1.7 percent last month – he did not expect to see a second recession, even in sluggish developed economies.

"At present, the economy hasn't yet sustained a large structural shock," Zhu said. "Technically speaking, we say an economy is in recession when it reports two consecutive quarters of negative growth. Right now, not even developed economies are likely to see that kind of contraction."

Avoiding a slide back into recession, however, will depend on governments enacting appropriate policies to rebalance their economies, Zhu added. Developing countries need to stimulate domestic demand, while developed nations need to boost investment.

Zhu said shocks in the U.S. and European markets will have a more limited impact on emerging economies than they have in the past, allowing countries such as China and India to continue rapid development.

But he warned that the low-interest, high-liquidity global environment also poses a threat to developing nations, as massive amounts of capital flow into emerging economies seeking higher returns.

Emerging economies have also created a new risk over the last two years by increasing the rate at which they issue new loans, Zhu added.

Before the crisis, developed countries were issuing about a dollar's worth of new loans for each dollar they added to their gross domestic product. But loans now far exceed development, with the ratio of new loans to GDP growth reaching 200 percent in China, 320 percent in India, 280 percent in Peru and 420 percent in Turkey, Zhu said.

Governments in these countries used loose lending and economic stimulus policies to maintain development during the crisis. But as global instability rises and growth slows, excessive lending and potentially poor asset quality become big potential risks, he said

"I don't think emerging markets have any reason to believe this is solely a crisis of developed nations," Zhu said.