With the US continuing to look better as a result of the sharp correction in household debt—personal consumption grew 1.5% in Q2, 1.6% in Q3 and 1.8% in Q4 2012—it is not surprising the IMF’s latest World Economic Outlook is somewhat optimistic about global growth. While it lowered its 2013 global forecast dramatically from 4.1% in April 2012 to 3.5% in January 2013, the latest 2012 forecast has been lowered to just 3.3%. For 2014, similarly, the 4% forecast was just marginally lower than the 4.1% forecast made in January. Indeed, had it not been for the US sequester and the slowing government consumption even before that—government consumption contracted 7% in Q4 2012—the global growth outlook would have been even better. Part of the better outlook, of course, is due to Japan where Abenomics is expected to lift 2013 growth by as much as 33% over that projected earlier. The joker in the pack, however, remains the euro area. While the IMF is looking at a minus 0.3% growth in 2013 becoming a 1.1% growth in 2014, how this will happen is unclear—keep in mind the IMF began its euro area 2013 projection with a 0.9% growth projection in April 2012, and this is now down to minus 0.3% today. While spreads in even peripheral Europe, as the WEO recognises, continue to remain low and periphery countries have successfully placed large volumes of long-term syndicated sovereign bonds, Europe still remains a big risk. IMF’s financial conditions index looks better but as the WEO recognises, the euro area remains highly vulnerable to adjustment fatigue or general policy back-tracking. Debt levels in Greece, for instance, are up from 148% of GDP in 2010 to 180% today, making it clear austerity is backfiring. Portugal is up from 93% to 122%, and Ireland from 92% to 122%. Till now, the view was the troika and the ECB’s unlimited Outright Monetary Transactions would help fix things, but after the Cypress ‘bail-in’, things no longer look so clear. That said, the IMF’s fan chart suggests that the probability that global growth will fall below 2% in 2013 has reduced to about 2% from around 17% in the October update of WEO.
For countries like India, the good news is the continued fall in commodity prices—a contraction of 2.3% in oil prices in 2013 and 4.9% in 2014. Global trade is also expected to pick up—from 2.5% in 2012 to 3.6% in 2013 and 5.3% in 2014. The flip side of this, though, is that as US and Japanese growth picks up, portfolio flows could slow in emerging markets.