THE ISSUE: IMF predicts slow, stressed recovery

Global growth was expected to strengthen gradually this year as the constraints of economic activity begin to ease, the International Monetary Fund (IMF) announced last Wednesday.
In an update to its World Economic Outlook (WEO), the IMF said the recovery would be slow and stressed that policies must address downside risks to bolster growth.
The report noted that policy actions have lowered acute crisis risks in the euro area and the United States while Japan’s stimulus plans will help boost growth in the near term, pulling the country out of a short-lived recession.
“Effective policies have also helped support a modest growth pickup in some emerging market and developing economies. And recovery in the United States remains broadly on track,” the IMF said.
Global growth is therefore projected to strengthen to 3.5 per cent this year from 3.2 per cent in 2012 – a 0.1 percentage-point downward revision from the October 2012 WEO.
If crisis risks do not materialize and financial conditions continue to improve, global growth could even be stronger than forecast, the report said.
It noted however that downside risks remain significant, including prolonged stagnation in the euro area and excessive short-term fiscal tightening in the United States.
The IMF observed that economic conditions improved slightly in the third quarter of 2012, driven by performance in emerging market economies and the United States. Financial conditions also improved, as borrowing costs for countries in the euro area periphery fell, and many stock markets around the world rose.
However, activity in the euro area periphery was even softer than expected, with some of that weakness spilling over to the euro area core, the report noted, adding that Japan moved into recession in the second half of last year.
The IMF downgraded its near-term forecast for the euro area, with the region now expected to contract slightly in 2013. The report observed that even though policy actions have reduced risks and improved financial conditions for governments and banks in the periphery economies, those had not yet translated into improved borrowing conditions for the private sector.
Continuing uncertainty about the ultimate resolution of the global financial crisis, despite continued progress in policy reforms, could also dampen the region’s prospects.
The IMF forecast two per cent growth in the United States this year, broadly unchanged from the October 2012 WEO. A supportive financial market environment and the turnaround in the housing market will support consumption growth.
The near-term outlook for Japan is also unchanged despite that country’s slipping into recession, because the stimulus package and further monetary easing will boost growth. Emerging market and developing economies are expected to grow by 5.5 per cent this year, broadly as predicted in the October 2012 WEO.
The report noted that the euro area continues to pose a large downside risk to the global outlook. While a sharp crisis has become less likely, “the risk of prolonged stagnation in the euro area would rise if the momentum for reform is not maintained,” the IMF said. To head off this risk, the report stressed, adjustment programmes by the periphery countries need to continue and must be supported by the deployment of “firewalls” to prevent contagion as well as further steps toward banking union and fiscal integration.
For the United States, the IMF stressed that “the priority is to avoid excessive fiscal consolidation in the short term, promptly raise the debt ceiling, and agree on a credible medium-term fiscal consolidation plan focused on entitlement and tax reform”.
The report also emphasized the importance of a credible medium-term fiscal strategy in Japan. Without it, the IMF cautioned that “the stimulus package carries important risks”.
“Specifically, the stimulus-induced recovery could prove short-lived, and the debt outlook significantly worse.”
For emerging market and developing economies, the report underscored the need to rebuild policy room for manoeuvre. It noted that “the appropriate pace of rebuilding must balance external downside risks against risks of rising domestic imbalances”.
Meanwhile, the Guardian reported that the global economy this year will exhibit some similarity to conditions that prevailed in 2012.
It projected another year when global growth will average about three per cent but with a multispeed recovery – a sub-par, below-trend annual rate of one per cent in advanced economies and close-to-trend rates of five per cent in emerging markets.
It noted, however, that there would be some important differences.
“Painful deleveraging – less spending and more saving to reduce debt and leverage – remains ongoing in most advanced economies, which implies slow economic growth. But fiscal austerity will envelop most advanced economies this year, rather than just the Eurozone periphery and [Britain].
“Indeed, austerity is spreading to the core of the Eurozone, the United States and other advanced economies (with the exception of Japan). Given synchronized fiscal retrenchment in most advanced economies, another year of mediocre growth could give way to outright contraction in some countries,” the article said.
It also noted that with anaemic growth in most advanced economies, the rally in risky assets that began in the second half of 2012 had not been driven by improved fundamentals, but rather by fresh rounds of unconventional monetary policy.
“Most major advanced economies’ central banks – the European Central Bank, United States Federal Reserve, Bank of England and Swiss National Bank – have engaged in some form of quantitative easing, and they are now likely to be joined by the Bank of Japan, which is being pushed toward more unconventional policies by Prime Minister Shinzo Abe’s new government,” it said.