Global growth to strengthen gradually in 2013, says IMF report

Friday, January 25, 2013
[PHOTO: UNifeed] 
Washington: Global growth will strengthen gradually in 2013, as the constraints on worldwide economic activity will start to taper off this year, the International Monetary Fund said in its World Economic Outlook Update, released Wednesday.

Policy actions have lowered the risks of a severe crisis in the euro area, the report noted. 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. Global growth is projected to strengthen slightly, to 3.5 percent this year from 3.2 percent in 2012—a downward revision of just 0.1 percentage point compared with its last October 2012 report.

If crisis risks do not materialize and financial conditions continue to improve, global growth could even be stronger than forecast, the report said. But risks remain significant, including prolonged stagnation in the euro area and excessive short-term fiscal tightening in the United States.

With the outlook remaining fragile, the report stressed the need for action to bolster the likelihood of recovery.

The IMF downgraded its near-term forecast for the euro area, with the region now expected to contract slightly in 2013. 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.

"Is Europe on the mend?  I think the answer is yes and no.  If you look at institutional progress, it's quite impressive.  We're not in the same place as we were last year.  The European construction is coming into play.  It's painful.  It's tough. Many negotiations.  But much progress.  No question," Olivier Blanchard, Chief Economist of the IMF, said.

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.

"There is almost no growth in the core.  There is negative growth in the periphery.  That's what we're predicting.  Something has to happen to start growth.  One can hope that the first two elements, the institutional progress, financial improvements, will lead to improvements, but we haven't seen it yet," Blanchard said.

The IMF forecasts growth of 2 percent 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.

For the United States, the IMF stressed that the priority is to avoid excessive budget tightening in the short term, promptly raise the debt ceiling, and agree on a credible plan to cut debt levels over the next 7-10 years, focused on entitlement and tax reform. Blanchard said that the measures agreed by the Congress for 2013 seem  appropriate.

"We think there will be between 1 and 1-1/2 percent of fiscal consolidation which seems about right.  What is true is that it hasn't solved the main problem which is the medium run fiscal consolidation.  That has to happen," Blanchard said.

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. The report also emphasized the importance of a credible debt strategy-cutting strategy in Japan for the next several years. Without it, the IMF cautioned that the stimulus-induced recovery could prove short lived, and the debt outlook significantly worse.

Emerging market and developing economies are expected to grow by 5.5 percent this year, as predicted in the October 2012 report. For these economies, the report underscored the need to rebuild policy room for manoeuvre. It noted that the appropriate pace of rebuilding must balance external risks against risks of rising domestic imbalances.

"In general our forecasts are better for 2013 than for 2012, and the main example is Brazil which grew at 1 percent in 2012 which we think they'll grow at about 3.5 percent in 2013.  For the other countries, China and India are slightly higher than last year.  So this is good.  It's not the rates that we saw before the crisis, but these rates are long gone.  These countries will have lower growth than they had," Blanchard said. -UNifeed
Next Post »