Assessing the Global Economy after the G-20

The global economic recovery is proceeding on twin tracks. Advanced economies face a tepid and uncertain recovery while emerging markets experience red-hot growth and try to cope with the risks of asset market bubbles and rising inflation. G-20 leaders need to forcefully address the complications created by this bifurcation of growth prospects and required policies. Otherwise, we are in for a train wreck.

Advanced economies are resorting to increasingly desperate measures to secure their recoveries. Rising levels of public debt and aggressive monetary easing, especially in this country, are generating enormous longer-term risks both domestically and globally.

Emerging-market economies have rebounded sharply from growth slowdowns and now face an altogether different set of short-term risks. These economies need tighter rather than more stimulative policies. This is complicated by the fact that emerging markets are facing a tidal wave of capital inflows, thanks in part to cheap money in advanced economies. These inflows are unlikely to ease anytime soon, given their strong growth prospects.

The recovery in advanced economies still needs support from macro policies, but their leaders should develop credible medium-term plans for withdrawing monetary stimulus and cutting public debt. Emerging markets should allow some currency appreciation and use incoming capital to broaden their financial markets rather than resort to futile measures such as capital controls.

The optimism of the summer is giving way to the realization that a balanced global economic recovery is going to be a long, hard slog. The G-20 objective of robust, balanced and sustainable growth remains elusive for now.