IMF's Chief Economist Says A Firm Hand Is Needed In Emerging Economies Or They Could Overheat
MAX FOSTER, CNN ANCHOR, QUEST MEANS BUSINESS: An oil spoiler. Tonight the IMF's chief economist and BlackRock's chief exec both tell us we're in a danger zone. Britain's banking balancing act, new rules and regulations are proposed. And a bid to buy Arsenal. Stan Kroenke becomes the major shareholder of the gunners. I'm Max Foster in for Richard Quest. This is QUEST MEANS BUSINESS. Hello to you. Boom and bust, could be back in 2011. The International Monetary Fund says a firm hand is needed in emerging economies or they could overheat. Rising prices caused by political upheaval also presents a new danger to the global economy. In its latest world economic outlook the IMF cut its forecast for U.S. economic growth this year from 3 percent to 2.8 percent. The report says the U.S. needs-uh, the U.S. now urgently needs to make spending cuts and reforms or it risks loosing credibility in the financial markets. For other developing economies and especially the Euro Zone. The biggest risks are the moribund housing market and sovereign debt. The forecast for the area still is up slightly to 1.6 percent. China's growth forecast stays strong at 9.6 percent. The IMF says countries with a big trade surplus, like China, should let exchange rates rise. It warns that runaway prices and too much credit are dangerous. The IMF says Japan's earthquake exacted a terrible human toll, but its impact on the global economy will be limited. Japan's economy, itself, will suffer with its growth forecast cut to 1.4 percent. The global growth forecast remains unchanged at around 1.5 percent. But the IMF says the global economy is still running at two speeds, with developing economies in the fast track and developed economies in the slow lane. The IMF's chief economist Olivier Blanchard told me more.</s>OLIVIER BLANCHARD, CHIEF ECONOMIST, IMF: The global economic recovery is strengthening, but it is unbalanced. And both aspects are important. I think the best way to show it is to give you three, for the world, for each year, for the next two years, 4.5 percent growth; but if you look at advanced economies 2.5 percent growth. If you look at emerging and developing economies, 6.5 percent growth. So it is really this unbalance, which is the issue.</s>FOSTER: Pretty good figures, generally, though. And actually you talk there about the emerging economies. You are concerned that they may be doing too well, aren't you? You are talking about them possibly overheating now?</s>BLANCHARD: No we're getting there. I mean for a number of countries we are-you know, we are back to the old trend. In some countries we are above it. We are starting to see signs of inflation. We are starting to see signs of very high credit growth. So, they have to watch out. They have to be ready to slow down a bit, yes, absolutely.</s>FOSTER: And how do they do that? Do they have to set up some sort of barriers, this hot money going around the world, is too much flowing into those economies?</s>BLANCHARD: No, I think they are facing two separate problems. They have to deal with both. But money is just started overheating, which would be there whether or not there were capital flows. And the other is how they deal with capital flows. So, much of what is happening is really domestically driven. They have to use the standard tools of policy, which is to increase the interest rate, do fiscal contraction where needed, that is needed. With respect to capital flows they have to be careful. If they see risk building up they have to use macro financial (ph) tools. They may have to use capital controls. But really the issue is overheating comes from the fact that the economies are just doing very, very well.</s>FOSTER: Unlike some European economies, obviously; those southern economies of Portugal, Spain, perhaps. Tell us about your concerns about the Euro Zone.</s>BLANCHARD: Well, you know, I think that there are the core countries and there indicate (ph) slow growth. They will get out of it. They have to push demand. They have to do structural reforms. Then we have these countries which are in more serious trouble, which are Greece, Ireland, and Portugal. And they have to put in place a fairly ambitious program of reforms. Now, these reforms are going to take-these are structural reforms, fiscal consolidation as well. They are going to take a long time to work out. And during that time it is very clear that they are going to be-they are going to need help on the financing and this is why we have these programs in place, in two countries, and hopefully, in the future, in the third one.</s>FOSTER: And one problem all economies are facing is escalating oil prices. What is your biggest concern there?</s>BLANCHARD: The concern is if the prices stay more or less where they are, where the markets think they are going to be, that is not a major concern. I mean, the increase in oil prices is not going to have the effects that it had in the 1970s. It is not going to create major stagflation. So, it will have some impact on inflation, some impact on growth. But things are very different from the `70s. I mean, you have-oil is playing less of a role, you don't have wage indexation, which was a big issue then. You have anchored expectations. So it is going to create a bit more inflation than would have otherwise have been the case. A bit less growth, but nothing major. Now, if the price were to go up to $150, or you know, or more, then clearly that is a different ballgame. But under the current assumptions, the current forecast, that is not a major issue.</s>FOSTER: OK, and a brief word, if you would on Japan. Obviously, it has had a terrible time of it recently.</s>BLANCHARD: Right.</s>FOSTER: How is the economy going to get through that?</s>BLANCHARD: Well, the economy is going to get through it. It is clearly going to affect growth a bit this year. But, you know, the Japanese economy is a very large economy, so in terms of macro numbers, this immense human tragedy, still is a limited macro event. So we have revised growth down by about 0.2, 0.3 percent. There is uncertainty about it, but of that order. And then they need to rebuild a lot which is going to boost growth, next year. So, in macro terms that is a serious issue, but it is not overwhelming. Again, in human terms, it is clearly.</s>FOSTER: Well, that is the IMF's view. The head of the world's largest money manager says oil prices are in a danger zone. Larry Fink, CEO of BlackRock, says anything above $120 a barrel will set back the U.S. economy. Felicia Taylor met Fink at BlackRock's New York trading floor to get his thoughts on oil instability and the European debt crisis.</s>FELICIA TAYLOR, CNN FINANCIAL CORRESPONDENT (voice over): Inside this nondescript office building in Manhattan, the world's largest money manager is at work. BlackRock controls assets worth more than $3.5 trillion, with clients, including the U.S. Federal Reserve. At the top is this man. You may not have heard of him, but CEO Larry Fink is one of the most powerful figures in the financial world. We met on BlackRock's trading floor where I asked about the market impact of global instability. (</s>On camera): Do you think that Americans have a false sense of this recovery, that things may not really be as good as people seem to think?</s>LARRY FINK, CEO, BLACKROCK: Actually I think the equity market is properly priced, and in fact, I think it is still undervalued. You know we have great corporate earnings. We have had U.S. corporations were in very good shape before the great recession, before the credit crisis, and they were able to lead the great recession in even better shape. They were able to build huge cash reserves. They were much more efficient. Efficiency means less jobs, by the way, but they are more efficient. And they were actually in a better position to really rebuild. We don't have a perfect picture in the United States, but we have a very prominent growth pattern for the private sector, related to the world. I think Libya is more drama than substance.</s>TAYLOR: But let's say that tensions escalate. Let's say that things do bleed over into places like Saudi Arabia. How much of a concern is that then?</s>FINK: The area where I'm most concerned about is Bahrain. So, Bahrain is a causeway, a bridge, across Saudi Arabia. A few miles-long bridge. And on the other side of that bride is the oil fields of Saudi Arabia. That area of eastern Saudi Arabia is also where all the many Shiites are. So the problems that you are seeing in Bahrain, which is being funded by Iran, is the most important thing to watch. And could that go over to Saudi Arabia? I don't think so. You saw that Saudi Arabia actually moved military alongside some other Gulf Region countries into Bahrain. So, you know, they are going to do whatever they can to protect their regimes.</s>TAYLOR: But if it is not manageable and we are already seeing oil prices teetering at about $108 a barrel, where do you see oil prices going in the near term?</s>FINK: In the near term, with the most recent stability you are going to see oil prices probably go back down a little. We don't know yet. So, if oil persists at $108 a barrel, I don't believe it will disrupt the U.S. economy. If oil creeps up and persists at $120, we are going to have some setbacks in the economy. It is a taxation to the consumer, who is already fragile.</s>TAYLOR: Coming up in June, the Federal Reserve will probably begin to wind down QE2. How much of a problem will that be for the equity and the bond market?</s>FINK: This is not a surprise. It is in the market. With perfect information in three months, the Federal Reserve is going to cease purchasing and, indeed, they begin to sell. And so we already know that. So, what will be the impact? I would say it would put a bias toward higher rates. But rates can't go that high unless there is a persistency in higher inflation, which we are not seeing yet, in the United States.</s>TAYLOR: Let's go back to European sovereign debt. How much of a concern is that for you? I mean, we still have problems in Greece, in Italy, in Spain, in Portugal. Name all the perilous (ph) countries.</s>FINK: Ireland.</s>TAYLOR: Exactly. Ireland, someplace where you have been very much involved in terms of the stress test. How much of a concern is that?</s>FINK: I think that is one of the most misunderstood problems. I think it is a severe problem. Because who owns these products today? The banking system.</s>TAYLOR: Uh-huh?</s>FINK: So, if these countries persistently have problems, and they have to be restructured in any way, then we have a real problem in the banking system. They are going to be undercapitalized. And so, to me the most-the biggest question I have right now is Europe, and the role between government and their banks.</s>FOSTER: One of the most powerful CEOs in the world there, speaking to Felicia. And if that has persuaded you to invest in your stocks, then here is where things stand at the moment. You will be interested, we'll be live on the trading floor of the New York Stock Exchange, coming up. Currently, up 0.2 percent, you can make your own judgment on whether that is overvalued or not.