By Don Alexander, MBA
Associate, RSD Solutions Inc.
Mr. Alexander also lectures at NYU and SunySB
The IMF noted in its latest World Economic Outlook (WEO – Oct. 2012) that the global recovery has suffered new setbacks, and uncertainty weighs heavily on the outlook. A key reason is that policies in the major advanced economies have not rebuilt confidence in medium-term prospects. Tail risks, such as those relating to the viability of the euro area or major U.S. fiscal policy mistakes, continue to preoccupy investors.
The WEO forecast sees only a gradual strengthening of activity from the relatively disappointing pace of early 2012. Projected global growth, at 3.3 and 3.6 percent in 2012 and 2013, respectively, is weaker than earlier estimates. Output is expected to remain sluggish in advanced economies but still relatively solid elsewhere. Unemployment is likely to stay elevated.
The forecast rests on two crucial policy assumptions. The first is that European policymakers––will adopt policies that gradually ease financial conditions further in periphery economies. In this regard, the European Central Bank (ECB) has recently done its part. It is now up to national policymakers to move and activate the European Stability Mechanism (ESM), while articulating a credible path and beginning to implement measures to achieve a banking union and greater fiscal integration.
The second assumption in the US is the spending cutbacks (the “fiscal cliff”) implied by existing budget law, raise the U.S. federal debt ceiling in a timely manner, and make good progress toward a comprehensive plan to restore fiscal sustainability.
More generally, downside risks have increased and are considerable. Failure to act on either issue would make growth prospects far worse. The WEO forecast said that monetary policy was expected to remain supportive. Major central banks have recently launched new programs to buy bonds and keep interest rates low. But the global economy remains fragile and budget austerity, while necessary, has slowed a recovery.
US growth will average 2.2 percent this year and rise to 2.75 percent later in 2013. Weak household balance sheets and confidence, relatively tight financial conditions, and continued fiscal consolidation stand in the way of stronger growth. Continued Fed easing will help.
In Europe, real GDP is projected to decline by 0.4 percent in 2012 overall and return to slightly positive territory in 2013. With lower budget cuts and domestic and euro area–wide policies, should support further improvement in financial conditions later in 2013. The core economies are expected to see low but positive growth, but peripheral countries may remain stagnant until mid-2013.
Elsewhere, Japanese growth is projected at 2.2 percent in 2012. Real GDP is forecast to stagnate in the second half of 2012 and grow by about 1 percent in early 2013. Thereafter, growth is expected to accelerate further.
Fundamentals remain strong in many economies that have not suffered a financial crisis. In these economies, high employment growth and solid consumption should continue to propel demand and, together with macroeconomic policy easing, support healthy investment and growth. China should be a driver for Asia with growth of 7% or slightly higher driven by public spending on infrastructure. Russia is expected to grow around 3-4%. India will experience slower growth in 2012 and moving toward 5% in 2013. Elsewhere, Latin America should see growth of 3-4% in 2012 and slightly higher in 2013 driven by Brazil.
Global imbalances, and the associated vulnerabilities, have diminished, but there is still a need for more decisive policy action to address them. Within the euro area, current account imbalances––and the deficits in most periphery economies––need to adjust further. At the global level, the current account positions of the United States, the euro area as a whole, and Japan are weaker than they would be with more sustainable fiscal policies—and the real effective exchange rates are stronger. In contrast, the current account positions of many Asian economies are undesirably strong and their exchange rates undesirably weak. In part, this reflects distortions that hold back consumption and reflects the effect of accumulation of foreign exchange.
In general, the policies required to lower current account imbalances and related vulnerabilities suit the interests of the economies concerned. More adjustment in external-deficit economies and more internal demand in external-surplus economies would contribute not only to a safer global economy but also to stronger growth for all. Many external-deficit economies need further fiscal adjustment and strengthened financial sector supervision and regulation. These efforts need to be complemented with structural measures, the details of which differ widely across countries. Otherwise, the global recovery will remain vulnerable to new accidents.
No comments:
Post a Comment