by Don Alexander, MBA
Associate, RSD Solutions Inc.
The global recovery is threatened by intensifying strains in the euro area and fragilities elsewhere. Financial conditions have deteriorated, growth prospects have dimmed, and downside risks have escalated. This was noted in the IMF’s latest semi-annual update World Economic Outlook (WEO) released on January 24th.
Global output is projected to expand by 3¼ percent in 2012—a downward revision of about ¾ percentage from the September 2011 WEO. The euro area crisis entered a perilous new phase as the sovereign debt crisis has evolved into a banking crisis. As a result, the euro area economy is now expected to go into a mild recession in 2012 as a result of the rise in sovereign yields, the effects of bank deleveraging on the real economy, and the impact of additional fiscal consolidation.
Growth in other advanced economies remains mixed, the US, Canada and Australia are seeing some internal dynamics that may offset the spillover effects from Europe. While the recovery for Japan and the UK will be more modest. For major advanced economies, the key policy requirements are to address medium-term fiscal imbalances and to repair and reform financial systems, while sustaining the recovery.
Growth in emerging and developing economies is also expected to slow because of the worsening external environment and a weakening of internal demand. Despite a modest downward revision to growth (including China), these countries are still expected to see steady growth in 2012. A number of these countries are expected to benefit from firm commodity prices.
The most immediate policy challenge is to restore confidence and put an end to the crisis in the euro area by supporting growth, while sustaining adjustment, containing deleveraging, and providing more liquidity and monetary accommodation. In emerging and developing economies, near-term policy should focus on responding to moderating domestic growth and to slowing external demand from advanced economies.
For further information on this, follow the link: www.imf.org/external/pubs/ft/weo/2012/update/01/index.htm
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