IMF Lowers Near-term Global Growth Forecasts; Further Policy Risks Remain
The latest projections in the IMF’s July 2012 World Economic Outlook (WEO) forecast slower global growth in 2012 and 2013 compared to the April 2012 outlook, with forecasts lowered for both developed and emerging countries.
According to the IMF, the key risks reflect the ability of leaders to implement the appropriate policy actions.
Many of the downward revisions for 2012 are due to the ongoing financial market turmoil in Europe. The continued problems in Greece and Spain and the uncertainty about the willingness and ability of those governments to implement the required fiscal reforms, coupled with hesitation from fellow euro area countries to provide assistance, have been weighing on global financial markets. Economic growth across the region has suffered as a result due to tight credit conditions, which has had a negative impact on peripheral European economies and Europe’s trading partners in other regions of the world.
Outright Monetary Transactions will boost Europe
Global markets were encouraged last week, however, by the announcement of a new plan by the European Central Bank (ECB) to buy euro area bonds. The ECB is launching a program called Outright Monetary Transactions (OMTs), allowing the ECB to make unlimited purchases of government bonds maturing within three years in the secondary market.
This action was seen as a positive one, fulfilling the promise made in July by ECB president Mario Draghi to do “whatever it takes” to preserve the euro. The bond purchases will be provided only to countries that agree to the fiscal austerity conditions outlined by the ECB, keeping in line with the IMF’s predication of its forecast on favorable policy action in the euro area.
United States will avoid “fiscal cliff”
Another assumption at the core of the IMF’s latest outlook is that the United States will avoid the looming “fiscal cliff” and that legislators will adopt credible solutions to deal with the country’s budget deficit and reduce the national debt. The fiscal cliff refers to the scheduled expiration of tax cuts and the automatic implementation of deep spending cuts at the beginning of 2013 that could subtract an estimated 3-4 percentage points from 2013 GDP growth, pushing the already fragile U.S. economy back into recession.
The last-minute debt ceiling agreement in July 2011 was reached only after an extremely contentious debate in the U.S. Congress, and the fear is that this scenario will repeat itself in 2013, when the U.S. is expected to hit the new debt ceiling.
The ugly and highly visible 2011 battle led credit-rating agency Standard & Poor’s to downgrade the U.S. from its coveted AAA rating to AA+. The IMF sees the impending fiscal policy debates in the U.S. as posing significant risks both to the outlook for the United States and to growth prospects for the rest of the world.
Emerging economies will strengthen
Although the IMF lowered its GDP outlook for emerging and developing economies in the July WEO, the forecast assumes that recent policy easing in emerging markets will stimulate growth going forward. Weak external demand was a factor in the slower growth outlook, but slowing domestic demand has also been a concern as these countries have dealt with capacity constraints and high interest rates in response to previously surging growth.
As a result, we have seen a number of developing countries slash interest rates in the last several months, most notably BRIC countries China (a combined 56 basis points in June and July 2012) and Brazil (nine cuts in the past year, totaling 500 basis points). The IMF expects these widespread rate cuts to support stronger economic activity in emerging economies in the near-term.
Ripples from global financial crisis will continue
Overall, the IMF’s latest projections reflect the persistent challenges faced by all countries in the aftermath of the global financial crisis. Europe is suffering the most, with the euro area forecast showing a contraction of 0.3% in 2012, followed by a meager 0.7% expansion in 2013. Central and Eastern Europe suffer as a result, with 2012 growth expected to be just 1.9%, followed by 2.8% in 2013.
Growth in the U.S. will pick up only slightly from 2011’s weak 1.7%, with the economy expanding by 2.0% in 2012 and 2.3% in 2013. The emerging world will see rapid growth in comparison to the developed world, but performance will be below that of past years. Developing Asia is expected to experience growth rates of 7.1% and 7.5% in 2012 and 2013, respectively, similar to the rates seen during the 2008-2009 global slowdown.
China and India are the primary drivers for the region; the IMF expects China’s real GDP to increase by 8.0% in 2012 and 8.5% in 2013, the slowest Chinese growth since 2001, while India’s economy will expand by 6.1% in 2012 and 6.5% in 2013.