by Don Alexander, MBA
Associate, RSD Solutions Inc.
The International Monetary Fund’s World Economic Outlook (WEO) (April 2012) assesses the prospects for the global economy, which has gradually strengthened after a major setback during 2011. Global prospects are gradually strengthening again but remain fragile. Downside risks remain elevated with unemployment still high in many advanced countries.
The threat of a sharp global slowdown eased with improved activity in the United States and better policies in the euro area. Weak recovery will likely resume in the major advanced economies, and activity will remain relatively solid in most emerging and developing economies. However, recent improvements are not deeply rooted. Global growth is projected 3.5% for 2012 and 4.1% for 2013. The breakdown for advanced countries is 1.4% and 2% and emerging/developing countries the outlook is 5.7% and 6%, respectively.
Highlights by region
In North America, US growth should rise from 2.1% to 2.5% next year reflecting ongoing fiscal consolidation and the continued overhang from housing. Canada is projected to grow at a 2% pace.
Japan, recovering from last year’s earthquake, should see output growth by 2% next year. In the rest of Asia, weaker external demand has somewhat dimmed the overall outlook. China, if it can avoid financial spillovers, should be able to maintain growth of a little over 8% driven by domestic demand. The rest of Asia, including India, should be able to maintain growth of around 6-7%.
In Europe, growth is projected to contract in the first half of 2012, but then show signs of recovery in the inner core. However, growth in peripheral countries will remain anemic, most likely below 1% next year. A major problem for most European countries is to limit the impact of spillovers from the banking sector to the real economy. UK prospects remain dim for 2012, but could see a recovery toward 2% in 2013.
In other parts of the world, Latin America should grow by 4% a year while other emerging countries could see growth approaching 5%. Russia could see some moderation of growth towards 4% as exports to Europe are weak and policy tightening is implemented.
The most immediate concern to the IMF outlook is still further escalation of the euro area crisis that could trigger a more generalized flight from risk. This scenario might produce a global and euro area output decline over a two-year horizon.
Alternatively, geopolitical uncertainty may cause a sharp increase in oil prices: a 50% price increase could lower global output by over 1%. The effects on output could be larger if the tensions were accompanied by financial volatility and a loss in confidence. Furthermore, excessively tight macroeconomic policies could push other of the major economies into sustained deflation or a prolonged period of weak activity.
Additionally, latent risks include disruption in global bond and currency markets as a result of high budget deficits and debt in Japan and the United States and rapidly slowing activity in some emerging economies.
However, growth could also be better than projected if policies improve further, financial conditions continue to ease, and geopolitical tensions recede. Policies must be strengthened to solidify the weak recovery and contain the many downside risks. In the short term, this will require more efforts to address the euro area crisis, a temperate approach to fiscal restraint in response to weaker activity, a continuation of very accommodative monetary policies, and ample liquidity to the financial sector. Policymakers must calibrate policies to support growth in the near term and implement fundamental changes to achieve healthy growth in the medium term. This challenge will include winding down unconventional monetary policies implemented during the crisis and the need to establish credible deficit reduction programs.
The risks to the recovery, while improving, continue to be very fragile.
For more on this follow the link: www.imf.org/external/pubs/ft/weo/2012/update/01/index.htm
