New Setbacks – Risks to the Global Recovery

by Don Alexander, MBA

Associate, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

The IMF noted in its latest interim World Economic Outlook (July 2012) noted the global recovery did not have a firm base and was showing a loss of momentum.  Financial market and sovereign stress in the euro area periphery have ratcheted up. Growth in a number of major emerging market economies has been lower than forecast.

 

The setback was partly because of a somewhat better-than-expected first quarter, the revised baseline projections in this WEO Update suggest that these developments will only result in a minor setback to the global outlook, with global growth at 3.5 percent in 2012 and 3.9 percent in 2013,  These forecasts, however, are predicated on two important assumptions: that there will be sufficient policy action to allow financial conditions in the euro area periphery to ease gradually and that recent policy easing in emerging market economies will gain traction.

 

Developments during the second quarter, however, have been worse. Relatedly, job creation has been hampered, with unemployment remaining high in many advanced economies, especially among the young in the euro area periphery.

 

Growth in advanced economies is projected to expand by 1.4 percent in 2012 and 1.9 percent in 2013. The downward revision mostly reflects weaker activity in the euro area periphery from a further escalation in financial market stress, triggered by increased political and financial uncertainty in Greece, banking sector problems in Spain, and doubts about governments' ability to deliver on fiscal adjustment and reform as well as about the extent of partner countries' willingness to help.

 

United States data suggest less robust growth than forecast in April. While distortions to seasonal adjustment and payback from the unusually mild winter explain some of the softening, there also seems to be an underlying loss of momentum.

 

Growth momentum has also slowed in various emerging market economies, notably Brazil, China, and India. This partly reflects a weaker external environment, but domestic demand has also decelerated sharply in response to capacity constraints and policy tightening over the past year.  Growth in emerging and developing economies will moderate to 5.6 percent in 2012 before picking up to 5.9 percent in 2013.

 

Global consumer price inflation is projected to ease as demand softens and commodity prices recede. Overall, headline inflation is expected to slip from 4½ percent in the last quarter of 2011 to 3–3½ percent in 2012–13.

 

The utmost priority is to resolve the crisis in the euro area. The recent agreements, if implemented in full, will help to break the adverse links between sovereigns and banks and create a banking union.  These tasks require policy measures in several areas: a credible commitment toward a complete monetary union, the monetary union must also be supported by wide-ranging structural reforms and resolve intra-area current account imbalances, demand support and crisis management are essential to cushion the impact of the region's adjustment efforts and maintain orderly market conditions, monetary policy has to ease further and fiscal consolidation plans must be implemented.

 

Clearly, downside risks continue to loom large, importantly reflecting risks of delayed or insufficient policy action. In Europe, the measures announced at the European Union (EU) leaders' summit in June are steps in the right direction. The very recent, renewed deterioration of sovereign debt markets underscores that timely implementation of these measures, together with further progress on banking and fiscal union, must be a priority. In the United States, avoiding the fiscal cliff, promptly raising the debt ceiling, and developing a medium-term fiscal plan are of the essence. In emerging market economies, policymakers should be ready to cope with trade declines and the high volatility of capital flows.

 

For more on this, follow the link:  www.imf.org/external/pubs/ft/weo/2012/update/02/index.htm

Risks to Global Growth & Recovery

by Don Alexander, MBA

Associate, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

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

IMF World Economic Outlook September 2011

by Don Alexander, MBA

Associate, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

  

The global economy has entered a dangerous new phase as the signs of an emerging recovery on 2010 have given way to a decline in confidence and the emergence of downside risk.  A number of shocks have hit the international economy from which it has not fully recovered: including the earthquake in Japan, political unrest in Arab countries, the fallout from political gridlock in Washington over deficit reduction and the unresolved sovereign debt crisis in Europe.  The structural problems facing crisis-hit advanced countries have proven more intractable than expected, but emerging markets have been the bright spot despite concerns about vulnerability to shocks.

 

The IMF World Economic Outlook (WEO) projections indicate that global growth will fall to 4% in 2011 from 5% in 2010.  In the advanced countries, growth is expected to be an anemic 1 ½% in 2011 from 2% last year.  This assumes that European policymakers can contain the sovereign debt crisis and US policymakers can reach a compromise on fiscal consolidation.  Emerging market should be able to maintain a solid pace of 6%.  The advanced countries will be paced by the US at 1.8%, Europe at 1.1% and Japan at 2.3% for 2012.  While China and India will pace emerging market countries at 9% and 7.5%, respectively. 

 

The report noted two lingering risks that could have severe negative consequences for global growth.  The first is the debt crisis in Europe spirals out of policymakers control and spills over into the global economy.  The US might be vulnerable if political gridlock remains over fiscal consolidation and the housing market remains in the doldrums from underwater mortgages.

 

The report noted that further progress was needed structural reforms for the global economy could return to a more stable growth trajectory.  First, private demand must take over from public demand.  On this issue, many countries have made progress, but the advanced countries have been the laggards.  Second, economies with large external surpluses must shift to reliance on domestic demand, while those with large deficits must do the opposite.  All countries must do more to advance rebalancing and to hedge against potential downside risks.

 

The optimism that greeted a rebound in the global economy in 2010 has given way to caution in 2011 as downside risks emerged.  The lack of prompt action by policymakers to address key issues could lead to another year of anemic economic prospects.

 

For more on the IMF’s views follow the link: www.imf.org/external/pubs/ft/survey/so/2011/RES092011A.htm