Info Service on Finance and Development (Oct12/03)
16 Oct 2012
Third World Network
lowers growth forecasts, prospects now bleaker
Published in SUNS #7456 dated 11 October 2012
Geneva, 10 Oct (Kanaga Raja) -- The International Monetary Fund (IMF)
has revised downwards its forecast for global growth made earlier
this year, and has now projected it to grow by 3.3 percent this year,
and 3.6 percent in 2013.
This "gloomier" outlook for the global economy has been
portrayed in the IMF's World Economic Outlook (WEO), released just
as the annual meetings of the IMF/World Bank take place this week
in Tokyo, Japan.
According to the WEO, the recovery has suffered new setbacks, and
uncertainty weighs heavily on the outlook, a key reason being that
policies in the major advanced economies have not rebuilt confidence
in medium-term prospects. "Tail risks, such as those relating
to the viability of the euro area or major US fiscal policy mistakes,
continue to preoccupy investors," it said.
The WEO forecast thus sees only a gradual strengthening of activity
from the relatively disappointing pace of early 2012. Projected global
growth, at 3.3 and 3.6 percent in 2012 and 2013, respectively, is
weaker than in the July 2012 WEO Update, which was in turn lower than
in the April 2012 WEO.
"A key issue is whether the global economy is just hitting another
bout of turbulence in what was always expected to be a slow and bumpy
recovery or whether the current slowdown has a more lasting component.
The answer depends on whether European and US policymakers deal pro-actively
with their major short-term economic challenges."
For the medium term, the IMF emphasised, important questions remain
about how the global economy will operate in a world of high government
debt and whether emerging market economies can maintain their strong
expansion while shifting further from external to domestic sources
Indicators of activity and unemployment show increasing and broad-based
economic sluggishness in the first half of 2012 and no significant
improvement in the third quarter. Global manufacturing has slowed
sharply. The euro area periphery has seen a marked decline in activity,
driven by financial difficulties evident in a sharp increase in sovereign
rate spreads. Activity has disappointed in other economies too, notably
the United States and United Kingdom.
Spillovers from advanced economies and homegrown difficulties have
held back activity in emerging market and developing economies. These
spillovers have lowered commodity prices and weighed on activity in
many commodity exporters.
The result of these developments is that growth has once again been
weaker than projected, in significant part because the intensity of
the euro area crisis has not abated as assumed in previous WEO projections.
Other causes of disappointing growth include weak financial institutions
and inadequate policies in key advanced economies. 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 the high pace of growth in these economies and building
Looking ahead, the IMF said that no significant improvement appears
in the offing. The WEO forecast includes only a modest re-acceleration
of activity, which would be helped along by some reduction in uncertainty
related to assumed policy reactions in the euro area and the United
States, continued monetary accommodation, and gradually easier financial
Healthy non-financial corporate balance sheets and steady or slowing
de-leveraging by banks and households will encourage the rebuilding
of the capital stock and a gradual strengthening of durables consumption.
In emerging market and developing economies, monetary and fiscal policy
easing will strengthen output growth.
However, the IMF warned, if either of two critical assumptions about
policy reactions fails to hold, global activity could deteriorate
The first assumption is that European policymakers take additional
action to advance adjustment at national levels and integration at
the euro area level (including timely establishment of a single supervisory
mechanism for banks). As a result, policy credibility and confidence
improve gradually while strains remain from elevated funding costs
and capital flight from the periphery to the core countries.
The second assumption is that US policymakers avoid the fiscal cliff
and raise the debt ceiling, while making good progress toward a comprehensive
plan to restore fiscal sustainability.
"Fiscal adjustment has been detracting from activity in various
parts of the world and will continue to do so over the forecast horizon
in the advanced economies but not in the emerging market and developing
The WEO said that in major advanced economies, general government
structural balances are on course to tighten by about three-quarter
percent of GDP in 2012, which is about the same as in 2011 and in
line with the April 2012 WEO projections. In 2013, the tightening
is projected to increase modestly to about 1 percent of GDP, but its
composition across countries will be different.
In the euro area, much adjustment has already been implemented and
the pace of tightening will diminish somewhat.
In the United States, the budget outlook for 2013 is highly uncertain,
given the large number of expiring tax provisions and the threat of
automatic spending cuts and in the context of highly polarised politics.
The fiscal cliff implies a tightening of more than 4 percent of GDP,
but the WEO projection assumes that the outcome would be only a one
and a quarter percent of GDP reduction in the structural deficit,
which is slightly more than in 2012, mainly on account of expiring
stimulus measures, such as the payroll tax cut, and a decline in war-related
In emerging market and developing economies, no significant fiscal
consolidation is on tap for 2012-13, following a 1 percent of GDP
improvement in structural balances during 2011. The general government
deficit in these economies is expected to remain below one and a half
percent of GDP, and public debt levels are expected to decline as
a share of GDP, toward 30 percent.
The WEO notes that with many economies in fiscal consolidation mode,
a debate has been raging about the size of fiscal multipliers. The
smaller the multipliers, the less costly the fiscal consolidation.
At the same time, activity has disappointed in a number of economies
undertaking fiscal consolidation.
So, the IMF said, a natural question is whether the negative short-term
effects of fiscal cutbacks have been larger than expected because
fiscal multipliers were underestimated.
According to the IMF, based on data for 28 economies, its main finding
is that the multipliers used in generating growth forecasts have been
systematically too low since the start of the Great Recession.
Despite the summer 2012 market rally, financial vulnerabilities are
higher than in the spring, said the WEO, adding that confidence in
the global financial system remains exceptionally fragile.
"Financial conditions are likely to remain very fragile over
the near term because implementing a solution to the euro area crisis
will take time and the US debt ceiling and fiscal cliff raise concerns
about the US recovery. Bank lending in the advanced economies is expected
to stay sluggish - much more so in the euro area, where the periphery
will suffer further reductions in lending. Most emerging markets will
likely experience volatile capital flows."
According to the WEO, the recovery is forecast to limp along in the
major advanced economies, with growth remaining at a fairly healthy
level in many emerging market and developing economies. Leading indicators
do not point to a significant acceleration of activity, but financial
conditions have recently improved in response to euro area policymakers'
actions and easing by the Federal Reserve.
In the euro area, real GDP is projected to decline by about three-quarter
percent (on an annualised basis) during the second half of 2012. With
diminishing fiscal withdrawal and domestic and euro-area-wide policies
supporting a further improvement in financial conditions later in
2013, real GDP is projected to stay flat in the first half of 2013
and expand by about 1 percent in the second half. The core economies
are expected to see low but positive growth throughout 2012-13. Most
periphery economies are likely to suffer a sharp contraction in 2012,
constrained by tight fiscal policies and financial conditions, and
to begin to recover only in 2013.
In the United States, real GDP is projected to expand by about one
and a half percent during the second half of 2012, rising to two and
three-quarter percent later in 2013. Weak household balance sheets
and confidence, relatively tight financial conditions, and continued
fiscal consolidation stand in the way of stronger growth. In the very
short term, the drought will also detract from output.
In Japan, the pace of growth will diminish noticeably as post-earthquake
reconstruction winds down. Real GDP is forecast to stagnate in the
second half of
2012 and grow by about 1 percent in the first half of 2013. Thereafter,
growth is expected to accelerate further.
Fundamentals remain strong in many economies that have not suffered
a financial crisis, notably in many emerging market and developing
economies. In these economies, high employment growth and solid consumption
should continue to propel demand and, together with macroeconomic
policy easing, support healthy investment and growth. However, growth
rates are not projected to return to pre-crisis levels.
In developing Asia, real GDP is forecast to accelerate to a seven
and a quarter percent pace in the second half of 2012. The main driver
will be China, where activity is expected to receive a boost from
accelerated approval of public infrastructure projects. The outlook
for India is unusually uncertain: For 2012, with weak growth in the
first half and a continued investment slowdown, real GDP growth is
projected to be 5 percent, 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 6 percent in 2013.
In Latin America, real GDP growth is projected to be about three and
a quarter percent for the second half of 2012. It is then expected
to accelerate to four and three-quarter percent in the course of the
second half of 2013. The projected acceleration is strong for Brazil
because of targeted fiscal measures aimed at boosting demand in the
near term and monetary policy easing, including policy rate cuts equivalent
to 500 basis points since August 2011. The pace of activity elsewhere
is not forecast to pick up appreciably.
In the central and eastern European (CEE) economies, improving financial
conditions in the crisis-hit economies, somewhat stronger demand from
the euro area, and the end of a boom-bust cycle in Turkey are expected
to raise growth back to 4 percent later in 2013.
Growth is projected to stay above 5 percent in sub-Saharan Africa
(SSA) and above 4 percent in the Commonwealth of Independent States.
In both regions, still-high commodity prices and related projects
In the Middle East and North Africa (MENA), activity in the oil importers
will likely be held back by continued uncertainty associated with
political and economic transition in the aftermath of the Arab Spring
and weak terms of trade - real GDP growth is likely to slow to about
one and a quarter percent in 2012 and rebound moderately in 2013.
Due largely to the recovery in Libya, the pace of overall growth among
oil exporters will rise sharply in 2012, to above six and a half percent,
and then return to about three and three-quarter percent in 2013.
"Risks to the WEO forecast have risen appreciably and now appear
more elevated than in the April 2012 and September 2011 WEO reports,
whose policy assumptions and hence growth projections for advanced
economies proved overly optimistic."
The WEO's standard fan chart suggests that uncertainty about the outlook
has increased markedly. The WEO growth forecast is now 3.3 and 3.6
percent for 2012 and 2013, respectively, which is somewhat lower than
in April 2012.
The probability of global growth falling below 2 percent in 2013 -
which would be consistent with recession in advanced economies and
a serious slowdown in emerging market and developing economies - has
risen to about 17 percent, up from about 4 percent in April 2012 and
10 percent (for the one-year-ahead forecast) during the very uncertain
setting of the September 2011 WEO, said the IMF.
The IMF staff's Global Projection Model (GPM) uses an entirely different
methodology to gauge risk but confirms that risks for recession in
advanced economies (entailing a serious slowdown in emerging market
and developing economies) are alarmingly high. For 2013, the GPM estimates
suggest that recession probabilities are about 15 percent in the United
States, above 25 percent in Japan, and above 80 percent in the euro
According to the IMF, immediate risks relate to the assumptions about
the sovereign debt crisis in the euro area and about the US budget,
both of which could negatively affect growth prospects. Furthermore,
oil prices could again provide a shock.
It explained that the euro area crisis could re-intensify again. The
OMT (Outright Monetary Transactions) program will reduce risks from
self-fulfilling market doubts related to the viability of the Economic
and Monetary Union (EMU) most effectively if it is implemented decisively.
However, serious risks remain outside this safety net - posed, for
example, by rising social tensions and adjustment fatigue that raise
doubts about adjustment in the periphery or by doubts about the commitment
of others to more integration.
The downside scenario developed here uses the IMF staff's Global Integrated
Monetary and Fiscal Model (GIMF) to consider the implications of an
intensification of euro area sovereign and banking stress, the IMF
said, adding that unlike in the WEO forecast and GFSR (Global Financial
Stability Report) baseline scenario, European policymakers in this
scenario do not strengthen their policies.
"In this scenario, the forces of financial fragmentation increase
and become entrenched, capital holes in banking systems expand, and
the intra-euro-area capital account crisis increasingly spills outward."
Within the GIMF, this scenario features the following shocks relative
to the WEO forecast: lower credit, mainly in the periphery; higher
sovereign risk premiums for the periphery; modestly lower premiums
for the core sovereigns, which benefit from a flight to safety; an
even larger fiscal consolidation in the periphery; and increases in
corporate risk premiums for all (including non-European) advanced
and emerging market economies.
Furthermore, monetary policy is constrained at the zero interest rate
floor in the advanced economies, and the assumption is that they do
not proceed with additional unconventional easing. Emerging market
economies, by contrast, are assumed to ease as growth and inflation
fall, which considerably reduces the impact of the external shock
on their economies.
In this scenario, the WEO projected that output in the euro area core
would fall by about one and three-quarter percent relative to its
projections within one year; in the periphery, the decline would be
about 6 percent. Output losses in non-European economies would be
about one to one and a half percent.
The second GIMF scenario assumes that national policymakers follow
up the latest ECB (European Central Bank) actions with a more proactive
approach toward domestic adjustment and EMU reforms. This scenario
requires regaining credibility through an unflinching commitment to
implementing already agreed plans. Policymakers need to build political
support for the necessary pooling of sovereignty that a more complete
currency union entails. It envisages that they quickly introduce a
road map for banking union and fiscal integration and deliver a major
Examples of possible action include implementation of a bank resolution
mechanism with common backstops or a pan-European deposit insurance
guarantee plan (for both, concrete proposals still need to be spelled
out) and concrete measures toward fiscal integration.
Under this scenario, the euro area begins to reintegrate as policy
credibility is restored and capital flight reverses. Credit expands
by roughly 225 billion euros and sovereign spreads decline by about
200 basis points in 2013 in the periphery of the euro area. Economic
growth resumes in the periphery and picks up in the core. In other
advanced economies, corporate spreads fall by 50 basis points; in
emerging market economies, by 100 basis points. Output would then
be roughly half to one percent higher within one year in most other
parts of the world.
The IMF further said that the US fiscal cliff could entail significantly
more fiscal tightening (by about 3 percent of GDP) than assumed in
the WEO projections. A recent Spillover Report (IMF, 2012) finds that
if this risk materialises and the sharp fiscal contraction is sustained,
the US economy could fall into a full-fledged recession. The global
spillovers would be amplified through negative confidence effects,
including, for example, a global drop in stock prices.
Acknowledging that the impact of hitting the debt ceiling is more
difficult to model, the WEO notes that political delays before the
previous deadline, in summer 2011, led credit rating agencies to downgrade
the United States, and major market turmoil ensued. At this stage,
markets appear to consider the fiscal cliff a tail risk, given that
Congress has in the past eventually reached a compromise to resolve
similar high-stakes situations. However, this implies that, should
this risk actually materialise, there would be a great shock to confidence
that would quickly spill over to financial markets in the rest of
The IMF also envisaged a large number of risks and scenarios for the
medium term, highlighting two specific risk scenarios and one general
risk scenario that appear pertinent for policymakers at this juncture.
The specific risk scenarios relate to large central bank balance sheets
and high public debt - they are directly relevant for monetary and
fiscal policy in the advanced economies. The general risk scenario
is for globally lower growth over the medium term.
"Looking beyond the near term, a concern is that output growth
may disappoint in both advanced and emerging market economies, albeit
for different reasons, and will precipitate a general flight to safety,"
it added, noting that growth outcomes have already disappointed repeatedly,
including relative to the September 2011 and April 2012 WEO projections.
"These disappointments could be symptomatic of medium-term problems."
Five years after the onset of the Great Recession, the WEO summarises,
the recovery remains tepid and bumpy, and prospects remain very uncertain.
Unemployment is unacceptably high in most advanced economies, and
workers in emerging market and developing economies face a chronic
struggle to find formal employment.
A basic challenge for policymakers is thus to move away from an incremental
approach to policymaking and address the many downside risks to global
activity with strong medium-term fiscal and structural reform programs
in order to rebuild confidence. In the euro area, action is also needed
to address the current crisis and, over the medium term, to complete
the EMU. Only after substantial progress is made on these various
fronts will confidence and demand strengthen durably in the major
Policymakers in emerging market and developing economies will need
to balance two priorities: rebuilding policy buffers so as to maintain
hard-won increases in the resilience of their economies to shocks
and supporting domestic activity in response to growing downside risks
to external demand, the WEO concluded. +