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News : Global Economy Last Updated: Oct 9, 2012 - 8:17 AM

IMF presents gloomier picture of global economy; Risks of slowdown “alarmingly high”
By Finfacts Team
Oct 9, 2012 - 5:49 AM

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The International Monetary Fund (IMF) presented a gloomier picture of the global economy than a few months ago, saying prospects have deteriorated further and risks increased. Overall, the IMF’s forecast for global growth was marked down to 3.3% this year and a still sluggish 3.6% in 2013, down from previous forecasts of 3.5% and 3.9% respectively. The Fund said the risks of a slowdown are “alarmingly high,” primarily because of policy uncertainty in the United States and Europe. The IMF predicts Irish GDP (gross domestic product) will expand 0.4% this year and 1.4% next year.

In its latest World Economic Outlook, unveiled in Tokyo ahead of the IMF-World Bank 2012 Annual Meetings, the IMF said advanced economies are projected to grow by 1.3% this year, compared with 1.6% last year and 3.0% in 2010, with public spending cutbacks and the still-weak financial system weighing on prospects.

Growth in emerging market and developing economies was marked down compared with forecasts in July and April to 5.3%, against 6.2% last year. Leading emerging markets such as China, India, Russia, and Brazil will all see slower growth. Growth in the volume of world trade is projected to slump to 3.2% this year from 5.8% last year and 12.6% in 2010.

“Low growth and uncertainty in advanced economies are affecting emerging market and developing economies through both trade and financial channels, adding to homegrown weaknesses,” said IMF chief economist Olivier Blanchard.

Annual Meetings in Tokyo

Release of the closely watched forecast opens a week of intense activity in Tokyo, where more than 10,000 central bankers, ministers of finance and development, private sector executives, academics, and journalists are gathered to discuss global economic issues at the World Bank-IMF annual meetings being held in the Japanese capital. Two other key economic assessments will be issued, the Global Financial Stability Report on the state of the financial sector and the Fiscal Monitor, which examines public finances.

The IMF said that its forecast rested on two crucial policy assumptions - - that European policymakers get the Eurozone crisis under control and that policymakers in the United States take action of tackle the “fiscal cliff” and do not allow automatic tax increases and spending cuts to take effect. Failure to act on either issue would make growth prospects far worse.

The forecast said that monetary policy in advanced economies was expected to remain supportive. Major central banks have recently launched new programs to buy bonds and keep interest rates low. But the global financial system remains fragile and efforts in advanced economies to rein in budgetary spending, while necessary, have slowed a recovery.

Projections by region

The recovery is forecast to limp along in the major advanced economies, with growth remaining at a fairly healthy level in many emerging market and developing economies. The IMF said leading indicators do not point to a significant acceleration of activity, but financial conditions have recently improved in response to euro area policymakers’ actions and easing by the U.S. Federal Reserve.

In the United States, growth will average 2.2% this year. Real GDP is projected to expand by about 1½% during the second half of 2012, rising to 2¾% later in 2013. Weak household balance sheets and confidence, relatively tight financial conditions, and continued fiscal consolidation stand in the way of stronger growth.

In the Eurozone, real GDP is projected to decline by 0.4% in 2012 overall - - about ¾% (on an annualized basis) during the second half of 2012. With lower budget cuts and domestic and euro area–wide policies supporting a further improvement in financial conditions later in 2013, real GDP is projected to stay flat in the first half of 2013 and expand by about 1% in the second half. The “core” economies are expected to see low but positive growth throughout 2012–13. Most euro area “periphery” economies are likely to suffer a sharp contraction in 2012, constrained by tight fiscal policies and financial conditions, and to begin to recover only in 2013.

In Japan, growth is projected at 2.2% in 2012. The pace of growth will diminish noticeably as post-earthquake reconstruction winds down. Real GDP is forecast to stagnate in the second half of 2012 and grow by about 1% in the first half of 2013. Thereafter, growth is expected to accelerate further.

Fundamentals remain strong in many economies that have not suffered a financial crisis, notably in many emerging market and developing economies. In these economies, high employment growth and solid consumption should continue to propel demand and, together with macroeconomic policy easing, support healthy investment and growth. However, growth rates are not projected to return to precrisis levels.

In developing Asia, real GDP growth will average 6.7% in 2012 and is forecast to accelerate to a 7¼% pace in the second half of 2012. The main driver will be China, where activity is expected to receive a boost from accelerated approval of public infrastructure projects. The outlook for India is unusually uncertain: for 2012, with weak growth in the first half and a continued investment slowdown, real GDP growth is projected to be close to 5%, but improvements in external conditions and confidence - - helped by a variety of reforms announced very recently—are projected to raise real GDP growth to about 6% in 2013.

In the Middle East and North Africa, activity in the oil importers will likely be held back by continued uncertainty associated with political and economic transition in the aftermath of the Arab Spring and weak terms of trade—real GDP growth is likely to slow to about 1¼% in 2012 and rebound moderately in 2013. Due largely to the recovery in Libya, the pace of overall growth among oil exporters will rise sharply in 2012, to above 6½%, and then return to about 3¾% in 2013.

In Latin America, real GDP growth is projected to be about 3¼% for the second half of 2012. It is then expected to accelerate to 4¾% in the course of the second half of 2013. The projected acceleration is strong for Brazil because of targeted fiscal measures aimed at boosting demand in the near term and monetary policy easing, including policy rate cuts equivalent to 500 basis points since August 2011. The pace of activity elsewhere is not forecast to pick up appreciably.

In the central and eastern European economies, improving financial conditions in the crisis-hit economies, somewhat stronger demand from the euro area, and the end of a boom-bust cycle in Turkey are expected to raise growth back to 4% later in 2013. The Commonwealth of Independent States will grow at 4.0% this year, with Russia posting growth of around 3.7%.

Sub-Saharan Africa is expected to continue growing strongly, averaging above 5%. Most countries in the region are participating in a strong expansion, with the exception of South Africa, which has been hampered by its strong links with Europe. Recently some food importers in the region have been hit by the sharp increase in global food prices for a few major crops.

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