Global Economic Recovery – Weakening ?

The IMF (International Monetary Fund) have reassessed their forecasts lower and have stated “the global economic recovery is weakening as government policies have failed to restore confidence….the risk of further deterioration in the economic outlook was considerable and had increased”.

The IMF downgraded its estimate for global growth in 2013 to 3.6% from the 3.9% it forecast in July. One of the biggest downgrades was to the UK economy, which is now expected to shrink by 0.4% rather than grow by 0.2% this year. (Change in the forecast since the figures produced in July 2012.)

In response to the downgrade, the UK Treasury highlighted the fact that the IMF had “repeated its advice that the first line of defence against slowing growth should be to allow the automatic stabilisers to operate, monetary policy easing and measures to ease the flow of credit – all of which the UK is doing”.

The overall forecasts are now approaching, in my opinion, more realistic estimates for the current cycle. I suggest that the original forecasts were high and the reality is growth but weaker and more muted growth.

IMF’s General Outlook

The overall economic view from te IMF – “output is expected to remain sluggish in advanced economies but still relatively solid in many emerging markets and developing economies”…but “much would depend on action taken by policymakers in Europe and the US”.

It highlighted the importance of the European Stability Mechanism (ESM), the eurozone’s new permanent fund to bail out struggling economies and banks launched earlier on Monday. The fund added that greater integration of taxation and spending policies across the eurozone was needed, as well as measures to begin the process of banking union.

The ESM, hailed on Monday by Jean-Claude Juncker, Prime Minister of Luxembourg and chair of the fund, as “an historic milestone in shaping the future of monetary union”, will have a lending capacity of 500bn euros (£400bn; $650bn) by 2014. It will be able to lend directly to governments, but it will also be able to buy their sovereign debts, which could help reduce the borrowing costs of highly-indebted countries such as Italy and Spain.

The IMF’s view of the US, “growth depended on a deal to avoid the so-called fiscal cliff, when automatic spending cuts and tax increases will kick in at the beginning of next year”. If policymakers fail to agree to delay these measures and increase America’s debt ceiling, “the US economy could fall back into recession”, with serious knock-on effects for the rest of the world”….”assuming agreement is reached, the US economy will grow by 2.1% next year”. This year, the US economy will actually grow by more than previously forecast – by 2.2% rather than 2%.

In Asia, “the near and medium-term outlooks are less buoyant compared with the region’s growth performance in recent years”. It highlighted weaker exports as a result of lower demand for goods in the West.

China, the world’s second-largest economy, would grow by 7.8% this year (down from its previous forecast of 8%), and by 8.2% in 2013 (down from 8.5% forecast in July 2012).

It also revised its growth forecasts for India, which would grow by 4.9% this year and 6.1% in 2013. 

Weaker demand for exports would also impact on Latin American economies, as would lower domestic demand due to government policy tightening. As a result, Brazil’s economy would grow by 1.5% this year and 4.0% in 2013.

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