The International Monetary Fund [IMF] has sharply revised down its global growth projections in one of its most objective post-crisis economic outlook reports, and called on policy-makers in Euro-zone and USA to deal proactively with their major short-term challenges to avert another bout of turbulence in the world economy.
Finance Ministers of more than 185 member-countries have tough challenges to confront as they meet in Tokyo for the annual Fund-Bank meetings [12-15 October]. The latest World Economic Outlook [WEO] lowers global growth projection for 2012 and 2013 to 3.3 and 3.6 per cent [2.6 and 2.9 per cent at market-based exchange rates] and revises down earlier growth estimates for virtually most economies of the world.
The principal areas for immediate attention for the two major advanced economies are the 'marked decline in activity driven by financial difficulties in euro-zone countries and thereby the increase in sovereign rate spreads' and 'persistent weakness' in US economy, which has prompted another round of policy stimulus by the Federal Reserve. Also, the overhanging ‘fiscal cliff’ would not be addressed [by the Congress, if at all] before the November presidential elections.
In emerging market economies, spillovers from advanced economies [like weakened demand] and 'homegrown' difficulties have held back activity. Furthermore, a significant part of the lower growth in emerging market and developing economies is related to domestic factors, notably constraints on the sustainability of high pace of growth in these economies and building financial imbalances.
While growth in China slowed sharply, owing to a tightening in credit conditions [in response to threats of a real estate bubble], and weaker external demand, WEO said, India’s activity 'suffered from waning business confidence amid slow approvals for new projects, sluggish structural reforms, policy rate hikes designed to rein in inflation, and flagging external demand.' Growth rates in the other BRIC economies, Russia and Brazil, have also been lowered.
The outlook for India is 'unusually uncertain', according to IMF’s WEO. For 2012, with weak growth in the first half and a continued investment slowdown, real GDP growth is projected to be five per cent, but improvements in external conditions and confidence – helped by a variety of reforms announced very recently – are projected to raise real GDP growth to about six per cent in 2013.
The weakening of growth in the first half, more than expected, is attributed by IMF as 'an outcome of stalled investment caused by governance issues and red tape, and a deterioration in business sentiment against the backdrop of a rising current account deficit and the recent rupee depreciation'.
Growth in India is projected to average 5-6 per cent in 2012-2013, more than one percentage point lower than in the April 2012. The downgrade reflects both an expectation that current drags on business sentiment and investment will persist and a weaker external environment. Compared with the region’s growth performance in recent years, the near-and medium-term outlooks are less buoyant. This view, IMF says, reflects weaker anticipated external demand resulting from the tepid growth prospects in major advanced economies and a downshift in China’s and India’s growth prospects, with a return to double-digit growth in China unlikely given the policy objectives laid out in the 12th Five-Year Plan. Growth in China is projected to be about 7.75 per cent this year and then to strengthen to 8.25 per cent in 2013 as domestic demand growth, especially investment growth, picks up with the policy easing now under way.
On global prospects, IMF expects 'slow and bumpy' progress in the world economy which saw broad-based sluggishness in the first half of 2012. And if the actions called for from EU and USA are not forthcoming, the current slowdown would have a more lasting impact, IMF said. Global manufacturing has slowed sharply and thus the world trade estimates are drawn down to 3.2 per cent and 4.5 per cent in 2012 and next year.
The current level of activity has raised questions for the medium-term – how global economy would operate in 'a world of high government debt' and whether emerging market economies can maintain 'strong expansion while shifting further from external to domestic sources of growth'. Domestic demand continued to lose momentum in key emerging economies.
Policy tightening in response to capacity constraints and concerns about the potential for deteriorating bank loan portfolios, weaker demand from advanced economies, and country-specific factors slowed GDP growth in emerging market and developing economies from about nine per cent in late 2009 to about 5¼ per cent recently.
The IMF staff’s Global Projection Model suggests that more than half of the downward revisions to real GDP growth in 2012 are rooted in domestic developments. Growth is estimated to have weakened appreciably in developing Asia, to less than seven per cent in the first half of 2012, as activity in China slowed sharply, owing to a tightening credit conditions.
In emerging market and developing economies, monetary and fiscal policy easing will strengthen output growth. However, if either of two critical assumptions about policy reactions fails to hold, global activity could deteriorate very sharply. No significant fiscal consolidation is on tap for 2012-2013, following a one per cent of GDP improvement in structural balances during 2011, the Outlook reports. Fiscal prospects, however, vary across economies. Policy will be broadly neutral in China, India, and Turkey in 2012 and 2013. The markdown in estimates for the medium-term output levels of emerging economies [relative to September 2011 estimates] is the highest for India at 10 per cent while it is five per cent for China and about three per cent for Brazil, 'and there may be more to come', IMF says.
Asian growth has moderated further with weaker external demand and the soft landing of domestic demand in China. Slowing growth in China has affected activity in the rest of Asia, a consequence of the deepening of linkages throughout the region in the past decade The outlook is for a modest pickup in growth on the back of recent policy easing. Limited direct financial spillovers and some room for policy easing should be helpful in minimising external downside risks. Balancing external and internal risks will be important, IMF says. On capital flows, IMF says, the recent shift in financial markets away from equity to bond flows in emerging market and developing economies could suggest that bonds issued by the latter are now considered safer for investors than before. However, it could also reflect a search for yield in the face of low global interest rates, which raises concerns about a potential increase in the exposure of these economies to such debt-creating flows. For economies at the receiving end, it is crucial to maintain strong macroeconomic and prudential policies that sustain market confidence and increase resilience to potential contagion.
Among advanced economies, the revised down GDP estimates for USA are: 2.2 and 2.1 per cent for the two years 2012 and 2013, EU -0.4 and 0.2 and Japan 2.2 and 1.2 per cent respectively. IMF cautions that the most immediate downside risk – that delayed or insufficient policy action would further escalate the euro area crisis – remains in place.
Other short-term risks are the looming US 'fiscal cliff' and delays in raising the US debt ceiling. These challenges should be addressed pro-actively. [IPA]
Finance Ministers of more than 185 member-countries have tough challenges to confront as they meet in Tokyo for the annual Fund-Bank meetings [12-15 October]. The latest World Economic Outlook [WEO] lowers global growth projection for 2012 and 2013 to 3.3 and 3.6 per cent [2.6 and 2.9 per cent at market-based exchange rates] and revises down earlier growth estimates for virtually most economies of the world.
The principal areas for immediate attention for the two major advanced economies are the 'marked decline in activity driven by financial difficulties in euro-zone countries and thereby the increase in sovereign rate spreads' and 'persistent weakness' in US economy, which has prompted another round of policy stimulus by the Federal Reserve. Also, the overhanging ‘fiscal cliff’ would not be addressed [by the Congress, if at all] before the November presidential elections.
In emerging market economies, spillovers from advanced economies [like weakened demand] and 'homegrown' difficulties have held back activity. Furthermore, a significant part of the lower growth in emerging market and developing economies is related to domestic factors, notably constraints on the sustainability of high pace of growth in these economies and building financial imbalances.
While growth in China slowed sharply, owing to a tightening in credit conditions [in response to threats of a real estate bubble], and weaker external demand, WEO said, India’s activity 'suffered from waning business confidence amid slow approvals for new projects, sluggish structural reforms, policy rate hikes designed to rein in inflation, and flagging external demand.' Growth rates in the other BRIC economies, Russia and Brazil, have also been lowered.
The outlook for India is 'unusually uncertain', according to IMF’s WEO. For 2012, with weak growth in the first half and a continued investment slowdown, real GDP growth is projected to be five per cent, but improvements in external conditions and confidence – helped by a variety of reforms announced very recently – are projected to raise real GDP growth to about six per cent in 2013.
The weakening of growth in the first half, more than expected, is attributed by IMF as 'an outcome of stalled investment caused by governance issues and red tape, and a deterioration in business sentiment against the backdrop of a rising current account deficit and the recent rupee depreciation'.
Growth in India is projected to average 5-6 per cent in 2012-2013, more than one percentage point lower than in the April 2012. The downgrade reflects both an expectation that current drags on business sentiment and investment will persist and a weaker external environment. Compared with the region’s growth performance in recent years, the near-and medium-term outlooks are less buoyant. This view, IMF says, reflects weaker anticipated external demand resulting from the tepid growth prospects in major advanced economies and a downshift in China’s and India’s growth prospects, with a return to double-digit growth in China unlikely given the policy objectives laid out in the 12th Five-Year Plan. Growth in China is projected to be about 7.75 per cent this year and then to strengthen to 8.25 per cent in 2013 as domestic demand growth, especially investment growth, picks up with the policy easing now under way.
On global prospects, IMF expects 'slow and bumpy' progress in the world economy which saw broad-based sluggishness in the first half of 2012. And if the actions called for from EU and USA are not forthcoming, the current slowdown would have a more lasting impact, IMF said. Global manufacturing has slowed sharply and thus the world trade estimates are drawn down to 3.2 per cent and 4.5 per cent in 2012 and next year.
The current level of activity has raised questions for the medium-term – how global economy would operate in 'a world of high government debt' and whether emerging market economies can maintain 'strong expansion while shifting further from external to domestic sources of growth'. Domestic demand continued to lose momentum in key emerging economies.
Policy tightening in response to capacity constraints and concerns about the potential for deteriorating bank loan portfolios, weaker demand from advanced economies, and country-specific factors slowed GDP growth in emerging market and developing economies from about nine per cent in late 2009 to about 5¼ per cent recently.
The IMF staff’s Global Projection Model suggests that more than half of the downward revisions to real GDP growth in 2012 are rooted in domestic developments. Growth is estimated to have weakened appreciably in developing Asia, to less than seven per cent in the first half of 2012, as activity in China slowed sharply, owing to a tightening credit conditions.
In emerging market and developing economies, monetary and fiscal policy easing will strengthen output growth. However, if either of two critical assumptions about policy reactions fails to hold, global activity could deteriorate very sharply. No significant fiscal consolidation is on tap for 2012-2013, following a one per cent of GDP improvement in structural balances during 2011, the Outlook reports. Fiscal prospects, however, vary across economies. Policy will be broadly neutral in China, India, and Turkey in 2012 and 2013. The markdown in estimates for the medium-term output levels of emerging economies [relative to September 2011 estimates] is the highest for India at 10 per cent while it is five per cent for China and about three per cent for Brazil, 'and there may be more to come', IMF says.
Asian growth has moderated further with weaker external demand and the soft landing of domestic demand in China. Slowing growth in China has affected activity in the rest of Asia, a consequence of the deepening of linkages throughout the region in the past decade The outlook is for a modest pickup in growth on the back of recent policy easing. Limited direct financial spillovers and some room for policy easing should be helpful in minimising external downside risks. Balancing external and internal risks will be important, IMF says. On capital flows, IMF says, the recent shift in financial markets away from equity to bond flows in emerging market and developing economies could suggest that bonds issued by the latter are now considered safer for investors than before. However, it could also reflect a search for yield in the face of low global interest rates, which raises concerns about a potential increase in the exposure of these economies to such debt-creating flows. For economies at the receiving end, it is crucial to maintain strong macroeconomic and prudential policies that sustain market confidence and increase resilience to potential contagion.
Among advanced economies, the revised down GDP estimates for USA are: 2.2 and 2.1 per cent for the two years 2012 and 2013, EU -0.4 and 0.2 and Japan 2.2 and 1.2 per cent respectively. IMF cautions that the most immediate downside risk – that delayed or insufficient policy action would further escalate the euro area crisis – remains in place.
Other short-term risks are the looming US 'fiscal cliff' and delays in raising the US debt ceiling. These challenges should be addressed pro-actively. [IPA]