Recovery to be “weak by historical standards” – IMF

Bank writedowns (Oct09).jpgThe good news is that the IMF thinks that the economy may have stopped getting worse. The bad news is that it thinks it may be a long time before we get back to earlier levels of demand.

The main problem is the ongoing weakness of the banking system. The IMF has maintained its April forecast of a total $2.8trn of losses. But as the chart shows, we are less than half-way towards all of these being recognised. Banks are still sitting on loans that will never be repaid – some of them, no doubt, in the chemical sector.

This means the world faces a further $1.5trn of write-offs over the next 18 months (the red bars). US banks have faced up to 60% of their expected losses, but EU banks are still hiding 60% of theirs. Overall, the IMF estimates banks will have to raise a further $310bn of capital. In turn, this overhang will reduce their ability, and willingness, to lend new money.

This makes the coming recovery very different from those of the early 1980’s and 1990’s, when banks were still able to lend freely. Thus the IMF forecasts that the current recovery will be “weak by historical standards”. And it warns that additional government stimulus programmes may be needed “if downside risks to growth materialise”.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. He also serves as a Global Expert for the World Economic Forum. The aim of this blog is to share ideas about the influences that may shape the chemical industry and the global economy over the next 12 – 18 months. It looks behind today’s headlines, to understand what may happen next in critical areas such as oil prices, China and Emerging Markets, currencies, autos, housing, economic growth and the environment. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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