IMF sees rosy future subject to two big caveats
A global growth of 3.5% in 2012, rising to 3.9% in 2013, is certainly a far cry from the 5.3% we saw in 2010. But then it’s also dramatically better than the -0.5% seen in 2009. And not only does the IMF’s latest update on the world economy see US growth rebounding from 2% in 2012 to 2.3% in 2013, it projects the euro area will get out of its 0.3% contraction in 2012 to a low but still positive 0.7% in 2013; China, despite the sharp slowing from 10.4% in 2010 to 9.2% in 2011 and a projected 8% in 2012, is seen as rebounding to 8.5% in 2013.
So what’s the problem and why the panic over the last year or more? This is when you begin to wonder if the IMF’s style of presentation, of underplaying the dangers, is likely to create a certain level of complacency—and let’s not forget the IMF repeatedly and dramatically underestimated the losses due to sub-prime loans in the US and the damage this would cause. After all, while giving the growth projections, the IMF’s World Economic Outlook (WEO) update begins by talking of how “the global recovery, which was not strong to to start with, has shown signs of further weakness.” Having said this, the WEO goes on to say the forecasts, “however, are predicated on two important assumptions”—that politicians in the US and the EU will get their act together. Both are very big assumptions.
In the US, after its Article IV consultations a few weeks ago, while lowering the 2013 projection to 2%, the IMF was speaking of a possible 1% growth in 2013 if the ‘fiscal cliff’ was not resolved—US recovery is largely government-driven, so if there is no agreement on further government spending, the structural fiscal deficit will fall by a whopping 4% of GDP in 2013, putting the entire recovery in jeopardy. That will have its own consequences for growth in China, for instance, where, though there is considerable fiscal room for expansive policies with the fiscal deficit at just 1.3% of GDP, it is the collapse of export markets of the US and EU which is behind the current decline—indeed, given China’s other structural problems, many are pencilling in a 6.5% growth over 5-10 years. Similarly, in the case of Europe where the effect of each solution at each miracle summit takes less than a week to dissipate, no real solution has been agreed to even now. And time is quickly running out. Spain, with its 730 billion euro of debt is just one notch above junk—one more downgrade and bondholders may not be able to hold on to its debt. Italy is still two notches above junk level, but its debt is a higher 1.9 trillion euro. Instead of whistling in the dark to keep up its courage, the IMF would do well to paint more realistic scenarios—if the US doesn’t arrive at a solution, for instance, and US growth falls to 1%, then ... or if Spain gets downgraded to junk, then ...