* IMF Cuts Growth Forecasts
Slower global growth in 2012
On 24 January 2012, the IMF cut its forecasts for global growth and warned of a deeper downturn worldwide if Europe does not take stronger action to stem its debt crisis. The global economy will now expand 3.3% y-o-y in 2012, down from 3.8% in 2011 (IMF’s September forecast estimated a growth of 4.0% y-o-y in 2012), and warned that that it could drop as low as 1.3% y-o-y if Europe’s problems persist.
Europe’s continuing woes The forecasts hinge on presumable increased efforts in the 17-nation Eurozone to fight the financial turmoil. IMF called for swift action by European policy makers, and estimated that the region will likely see its economy contract in 2012 by 0.5% y-o-y, underpinned by the rise in sovereign yields, the effects of bank deleveraging on the real economy, and the impact of the additional fiscal consolidation announced by euro area governments. Consequently, the largest impact of the slowdown would likely be felt in Central and Eastern Europe, which has strong trade links with the Euro-zone economies. In effect, the IMF shaved off 1.6 percentage points from its last forecast for 2012 in September–reflecting its worst-case scenario–after risks escalated sharply in the last quarter of the year, when the debt crisis “entered a perilous new phase.” Under its optimistic scenario, the IMF expects growth to return to the region next year.
Thus, IMF head Ms. Christine Lagarde and her lieutenants are now urging euro-zone leaders to boost the size of the European debt-crisis firewall, implement pro-growth policies and further integrate the monetary union. As of late, funding costs for some of the region’s biggest economies are hitting levels not seen since the launch of the European Economic and Monetary Union.
In addition, confidence in Europe’s strategy for coping with the crisis was dealt a setback late on Tuesday in Brussels when European finance ministers pushed bondholders to provide greater debt relief for Greece. European governments sought to fill a deeper-than-expected hole in Greece’s finances by saddling investors with a lower interest rate on exchanged bonds, setting up a confrontation in the run-up to a January 30 2012 European Union summit. At the same time, efforts to shore up Greece were flanked by headway on a German-inspired deficit-reduction treaty and indications that a cap on rescue lending might be boosted.
The IMF, which co-finances loans to Greece, Ireland and Portugal, is urging the Group of 20 industrialised and developing countries to boost the fund’s lending resources to over USD1.0tln. That way, Europe could use its bailout fund to help boost banks’ cash levels and keep its euro-zone financing costs down while the IMF helps bail out ailing economies. The fund also wants the European Central Bank to continue its bond-buying program, maintain ample credit in the financial system and ease policy interest rates.
Moving forward, the IMF states that the most immediate policy challenge is to restore confidence and put an end to the crisis in the euro area by supporting growth while sustaining adjustment, containing deleveraging, and providing more liquidity and monetary accommodation.
Other Key highlights
Economic activity in advanced economies would expand by 1.5% y-o-y on average in 2012 and 2013. With only limited policy room, growth in most other advanced economies will be slower, mainly due to adverse spill overs from the euro area via trade and financial channels that exacerbate the effects of existing weaknesses. For the US, the IMF maintained its 1.8% y-o-y growth forecast in 2012, however strong underlying domestic demand dynamics could offset any impact of growing turmoil in Europe.
The projection for Japan was also cut from September’s 2.3% y-o-y to 1.7% y-o-y in 2012, and urged Tokyo to be more ambitious in reducing its debt and implementing a consumer tax.
Growth in emerging economies is projected to slow to 5.4% y-o-y in 2012, down from 6.2% y-o-y in 2011 and well below the previous projection of 6.1% y-o-y. This is underpinned by the deterioration in the external environment, as well as the slowdown in domestic demand in key emerging economies. Meanwhile, for fast-growing emerging Asia as a whole, the IMF reduced its growth outlook for 2012 to 7.3% y-o-y (Previous forecast: 8.0%).
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