IMF expects the world economy to expand 3.5% in 2012

23 Jul

IMF says it expects the world economy to expand 3.5%  in 2012 down slightly from its previous estimate of 3.6% in April. In a quarterly update to its World Economic Outlook issued Monday, the IMF also cut its  forecast to 3.9% in 2013, from 4.1% three months ago.

The Fund cut its US growth  forecast to 2% this year from its previous estimate in April of 2.1% and kept  Eurozone performance in 2012 unchanged at a contraction of 0.3% and down from a  growth of 0.9% in 2013 to 0.7%. For 2013, it expects US growth of 2.3%, down from 2.4%.

An already sluggish global recovery shows signs of further weakness,  mainly because of continuing financial problems in Europe and  slower-than-expected growth in emerging economies, the IMF said in a regular  update to its World Economic Outlook (WEO).

Two other IMF reports were also released July 16. The update to theGlobal  Financial Stability Report (GFSR)  said that risks to financial stability increased in the second quarter of 2012  because of the continued slow global recovery and fears about the quality of  bank assets in Europe.

An update to the IMF’sFiscal  Monitor said that fiscal  adjustment in both advanced and emerging economies is proceeding as expected.

The latest World  Economic Outlookprojects that  the global economy will grow 3.5% this year, down 0.1%age points  from the April forecast, and 3.9% in 2012, 0.2%age points lower  (see table).

“More worrisome than these revisions to the baseline forecast is the increase in  downside risks,” said Olivier Blanchard, the IMF chief economist and director of  the IMF’s Research Department, which prepares the WEO. The IMF emphasised that the relatively minor setback to the global outlook under  its baseline projections is based on three important assumptions:

  • that there will be enough policy action for financial conditions in the  so-called euro area periphery, which includes Greece and Spain, to ease  gradually through 2013;
  • that US fiscal policy does not tighten sharply in 2013; and
  • that steps by some major emerging markets to stimulate growth gain traction.

The IMF said the most immediate risk to the global recovery is that delayed or  insufficient policy action will further escalate the euro area crisis. “Simply  put, the Eurozone periphery countries have to succeed,” said Blanchard.

The report  cited agreements at the June 28 eurozone summit as a step in the right  direction. It said the summit actions should help break the “adverse links  between sovereigns and banks and create a banking union. ”

But the recent  deterioration in sovereign debt markets demonstrates that timely implementation  of these measures, together with further progress on banking and fiscal unions,  must be a priority.

The WEO update also cited the possibility that growth in the United States would  stall because of excessive fiscal tightening caused by political gridlock. “In  the extreme, if policymakers fail to reach consensus on extending some temporary  tax cuts and reversing deep automatic spending cuts,” the US economy could  face a steep decline of more than 4% of GDP in its fiscal deficit in  2013.

That so-called fiscal cliff would cause a severe decline in US growth,  with “significant spillovers to the rest of the world.” Moreover, if the United  States does not act promptly to raise its federal debt ceiling, there will be  increased risk of financial market disruption and loss in consumer and business  confidence.

Growth has slowed in a number of major emerging economies, especially Brazil,  China, and India. This was due both to a weaker external environment and a sharp  deceleration in domestic demand in response to capacity constraints and policy  tightening.

Overall, though, emerging markets have weathered the crisis well. In contrast to the broad trends in the rest of the world, growth in the Middle  East and North Africa will be stronger, as key oil exporters continue to boost  oil production and drive up domestic demand, while activity in Libya rebounds  after the 2011 unrest. Sub-Saharan Africa, which has been insulated from  external financial shocks, is also expected to enjoy relatively robust growth in  2012–13.

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