|A bit safer, a bit slower|
|Wednesday, 18 April 2012 02:06|
But IMF projections still hostage to Europe and Iran
Given the continuing crisis in Europe, it’s not surprising the IMF’s latest World Economic Outlook (WEO) expects output in 2012 to contract a bit (0.3%), though the outlook is better than the 0.5% contraction projected just three months ago—in September 2011, such has been the pace of deterioration in the continent, the IMF was still looking at a 1.1% increase in European output! Not surprisingly, given the sharp recovery in the US, the latest WEO raises its 2012 forecast from 1.8% in January to 2.1% now. For the world as a whole, growth is expected to slow, from a 3.9% growth in 2011 to 3.5% in 2012 before recovering to 4.1% in 2013—in September 2011, the IMF was looking at a 4.5% growth in 2013!
Almost all the change we’re seeing, as is understandable, is based on the levels of deleveraging in various countries, and therefore the degree of vulnerability. Since US households have, according to a McKinsey study just around two more years to go before they reach pre-2000 levels of debt, growth prospects there look the brightest. Indeed, with US labour costs falling, the growth in US manufacturing jobs is now at a pace last seen in the late 1990s (‘America’s ready to roll, again’, March 31, http://bit.ly/HEymy0).
Which is why IMF says the overall risks have fallen significantly—in the September 2011 WEO, the risk of global growth falling below 2% was 10%, today that risk is down to around 1%. This, however, does not say growth, albeit a slower one, is now a given. Financial stability remains the key worry area and both governments and banks in the Europe area have refinancing needs that add up to around 23% of GDP; banks themselves will see a $2.6 trillion reduction in their balance sheets over the next two years. In such a situation, if financial markets get jittery, and there seems to be a new reason for this ever so often, and euro-area governments are forced to do some more up-front consolidation, this could see private investment falling 15% and European output falling. An Iran conflict could see oil prices rising 20-30% initially and by even 50% as fears of supply shocks spread—at the global level, this could see an output reducing by as much as 1.25%. In other words, the world still needs to navigate itself out of trouble quite carefully.