The global economy is much weaker
than it was just months ago, and growth will pick up only slightly in 2012, the
International Monetary Fund said Tuesday.
World growth projected
at 4% in both 2011 and 2012, down from over 5% in 2010, the IMF said in its
And even this lowered projection
counts on a lot going well.
The IMF foresaw a slowdown this year
after strong growth in 2010 as fiscal stimulus packages in response to the
crisis wound down. But a barrage of economic shocks in 2011 combined with other
factors for a worse than anticipated outcome.
“The global economy is in a
dangerous new phase. Global activity has weakened and become more uneven,
confidence has fallen sharply recently, and downside risks are growing,”
the IMF said in its September 2011
World Economic Outlook (WEO).
The report, released in Washington
on September 20, says strong and coordinated action is necessary to avert a
decade of lost growth in the advanced economies.
“Strong policies are
urgently needed to improve the outlook and to reduce the risks,” said IMF chief economist Olivier Blanchard. “Only if governments move decisively on fiscal policy, financial
repairs, and external rebalancing, can we hope for stronger and more robust
Real GDP (gross domestic product) is expected to grow by a
fairly robust 6.4% in emerging and developing economies but by only 1.6% in
advanced economies in 2011(see chart above).
Irish GDP is forecast to grow by 0.4% in 2011 and 1.55 in 2012.
These WEO projections rest on a
number of assumptions: that European policymakers will be able to contain the
euro area crisis to the so-called periphery countries, that U.S. policymakers
strike a judicious balance between support for the economy and medium-term
fiscal consolidation, and that ups and downs in global financial markets don't
get worse. If the assumptions are not met, global growth will be much lower.
One-off shocks including the
earthquake and tsunami in Japan and social unrest in some oil-producing
countries, stalling of the handover from private to public demand in the U.S.
economy, major financial turbulence in the euro area, and sell-off of risky
assets in global markets hit advanced country growth hard. And market concerns
about the ability of many countries to stabilize their public debt are
stifling/putting a damper on financial flows.
Twin rebalancing act
The WEO repeated its mantra that
both domestic and external rebalancing are essential to a revitalized global
First, to achieve
internal rebalancing, private demand has to take over from government stimulus.
Despite considerable progress on this front in many countries, the
major advanced economies lag behind. Reasons vary by country but tight bank
lending, repercussions from the housing boom, and high household indebtedness
are all putting stronger brakes on the recovery than expected.
Fiscal consolidation cannot be so
fast that it kills growth, nor so slow that it kills recovery, said Blanchard.
The key is credible medium-term consolidation. Other measures to prop up
domestic demand, including continued low interest rates, increased bank lending,
and housing loan resolution programs, are also essential, he stressed.
Second, countries with
large external surpluses must achieve more domestically driven growth, while
those with large deficits, most notably the United States, must do
the opposite. This is not happening. While imbalances did fall during the
crisis, that was due to the large decrease in demand for imports in advanced
economies relative to precrisis trends, rather than an increase in imports by
emerging economies with external surpluses. Now the forecast is for an increase
rather than a decrease in imbalances.
Fiscal and financial
Market worries about the ability of
countries to stabilize their public debt have spread from a few small countries
on the periphery of Europe to more counties in Europe and beyond to the United
States and Japan. And concerns about sovereign debt and by extension that of the
banks holding sovereign bonds have lead to a freeze of financial flows as the
banks maintain high liquidity and tighten lending. There is a real risk of a
feedback loop between low growth, nonperforming loans, weakened banks, and cuts
Until now emerging markets have
enjoyed immunity from adverse global economic developments. They now face even
more volatile capital flows and, along with low-income countries, diverse export
The risks to the global economy are
many, but three in particular demand strong action by policymakers:
In the Eurozone,
banks must be made stronger, not only to avoid deleveraging and maintain
growth, but also, and more importantly, to reduce risks of vicious feedback
loops between low growth, weak sovereigns, and weak banks. This requires
additional capital buffers, from either private or public sources.
The top priorities in the
United States include devising a medium-term
fiscal consolidation plan to put public debt on a sustainable path and to
implement policies to sustain the recovery, including by easing the
adjustment in the housing and labor markets. The new American Jobs Act would
provide needed short-term support to the economy, but it must be flanked
with a strong medium-term fiscal plan that raises revenues and contains the
growth of entitlement spending.
the government should pursue more ambitious measures to deal with the very
high level of public debt while attending to the immediate need for
reconstruction and development in the areas hit by the earthquake and
Building on success
The Fund says the situations of
emerging and developing economies vary widely, but
after strong growth in recent years and on the horizon, most are in the enviable
position of being able to invest in growth and employment and to brace against
future global economic volatility. In a number of economies, signs of
overheating continue to warrant close attention. In others, monetary tightening
can pause while uncertainty is very high. Most economies should continue to
lower fiscal deficits.
Large capital inflows in some
emerging economies are a signal to those countries to further strengthen their
macroeconomic and financial policy frameworks and reform their economies so that
these inflows have productive outlets. And high food prices underscore the need
for developing well-targeted social safety nets that protect the most vulnerable