INSIGHT: IMF again lowers its outlook for US, global economies

10 October 2013 16:29  [Source: ICIS news]

By Joe Kamalick

IMF says global economy is facing new risksWASHINGTON (ICIS)--The International Monetary Fund (IMF) has again lowered its expectations for the global economy, warning that nations big and small are facing new challenges and that downside risks to the world’s economies have increased.

The IMF’s latest world economic outlook (WEO) paints a somewhat darker picture than the fund’s economists had forecast as recently as July this year - and that July outlook represented yet another downgrade for global economic prospects.

The new global economic outlook also comes in the wake of a mid-September analysis by the IMF saying that growth prospects for the 17 nations of the eurozone have declined since 2011 and likely will remain weak for some time to come.

In addition to economic weakness in Europe, the IMF also cautions that US fiscal uncertainties and lower growth prospects for China and other emerging economies combine to darken the global outlook still further.

“Global growth is still in low gear and the drivers of growth are shifting,” IMF said in its new worldwide outlook.

In essence, said the IMF study, the global economy can no longer depend on rapid growth in emerging nations to shore up still wobbly economies in most developed nations.

As a consequence, the fund said it had to lower its forecast for global economic growth for this year to 2.9%, below the 3.2% growth rate seen in 2012 and even a bit lower than the 3% worldwide growth rate for this year that IMF had forecast in early July.

“Growth in major emerging markets,” said the IMF, “although still strong, is expected to be weaker than the IMF forecast in its July 2013 WEO.”

Slowing growth among emerging nations, said the report, “is partly due to a natural cooling in growth following the stimulus-driven surge in activity after the Great Recession”, referring to the 2008-2009 recession that for the US ended in June 2009.

“Structural bottlenecks in infrastructure, labour markets and investment also have contributed to slowdown in many emerging markets,” the new analysis said.

While emerging market economies are said to be slowing, Europe remains at near-recession levels and the US Federal Reserve Board appears poised to ease back from its long-running stimulus efforts.

“These growth transitions [among emerging economies] combined with an approaching turning point in US monetary policy have led to new challenges and risks,” the IMF said.

In addition, “there is a distinct risk that financial conditions will tighten from their current, still supportive levels”, the outlook said.

That’s putting it mildly.

The IMF said that its outlook for the US economy for the balance of this year and for 2014 is “based on the key assumption that the on-going shutdown in the federal government will be short-lived and the debt ceiling will be raised on time”.

But even assuming a rosy outcome for the US spending conflict and the debt ceiling crisis - an outcome that just now does not look remotely rosy - the IMF has again downgraded its outlook for the US economy.

In June the IMF said that was lowering its forecast for US gross domestic product (GDP) growth for this year to 1.9%, down from the 2.3% 2013 GDP expansion the fund had predicted in July 2012.

Now with its latest forecast, the IMF said it sees US annual GDP growth for this year at no better than 1.5% - almost a full point lower than its year-ago outlook.

In normal economic times, the US economy would be expected to grow at a pace of 3% to 3.5% annually.

The fund’s expectations for the eurozone are even more sobering.

On one hand, said the IMF report, eurozone policy actions “have reduced major risks and stabilised financial conditions, although growth in the periphery is still constrained by credit bottlenecks”.

However, the reduction in risks and some stabilisation of eurozone finances still leaves the broader European economy in doldrums, with the IMF unwilling to forecast any eurozone growth for this year and only a 1% expansion in 2014.

Even that narrowly modest outlook seems to conflict with the eurozone analysis the IMF made little more than three weeks ago on 13 September.

In that assessment, IMF said that “the growth outlook for the euro area has worsened considerably compared to what it was in 2011 as private demand has not been picking up from public demand”, a reference to consumer spending versus government stimulus outlays.

In addition, the IMF appraisal said that in the euro area “economic activity will likely remain weak for some time, reflecting fiscal consolidation, bank balance sheet repair and in some cases debt overhang of corporations and households”.

“Moreover, the negative impact of financial fragmentation in the euro area has weighed on growth and pressured external adjustment,” the analysis said, referring to weakened economies in several EU-member nations such as Greece, Spain and Italy.

Weak growth in the eurozone, said the IMF, “is leading to a worsening of the debt dynamics despite substantial fiscal consolidation”.

The prospects for a further decline in the global economic outlook outweigh hopes for a worldwide recovery, the IMF indicated.

“The WEO emphasises that the changing global growth constellations have exacerbated risks in emerging market economies,” the IMF analysis said.

Translation: As the US economy stumbles through a mediocre recovery and the eurozone continues in near recession with little growth ahead, emerging market economies are at risk for further decline as American and European export markets remain moribund at best.

On top of those threats to the global economy, the IMF warns that “old risks remain”.

Those old residual risks include unfinished financial sector reforms in the eurozone, impaired monetary policy transmission and corporate debt overhang in some euro area economies, the IMF said.

“High government debt and related fiscal and financial risks in many other advanced economies, including Japan and the US” have increased global economic risks, the IMF said.

The IMF was established in the closing days of World War II to promote international monetary cooperation and stability, foster economic growth and employment and to provide financial assistance to countries to help ease balance of payments problems.

Under its multinational mandate, the IMF periodically reviews the economic conditions and stability of its 188 member countries, major regions and, as in this week’s report, offers an overall global outlook.

($1 = €0.74)

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By: Joe Kamalick
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