Global Economy
IMF cuts Irish GDP 2011 growth forecast in half; Says global economic recovery gaining strength
By Finfacts Team
Apr 11, 2011 - 3:51 PM

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Source: IMF

The International Monetary Fund (IMF) has cut its Irish GDP (gross domestic product) growth forecast in half and sees growth in 2011 at 0.5%, compared with a forecast of around 1% late last year. It says the global economic recovery is gaining strength, with world growth projected at about 4½% in both 2011 and 2012, but unemployment remains high, and risks of overheating are building in emerging market economies.

IMF economists in the bi-annual World Economic Outlook, say a decision on changing the interest rates charged to countries under the EU's bailout rules is 'urgently needed'.

The IMF says that Ireland's unemployment rate will average 14.5% this year, falling to 13.3% in 2012. Inflation in Ireland is forecast to be 0.5%, compared with a Eurozone average of 2.3%.

Earlier Monday, the Bank of Ireland said the past month has thrown up two surprising and unwelcome data releases in Ireland. The first was that the unemployment rate over the past six months has been much higher than previously published, on the basis that the labour force stopped falling in the final quarter of 2010. This in turn implies that the scale of net emigration of late is much lower than previously thought, contrary to popular belief. The bank says it is doubtful whether this marks a clear break in the previous trend but the near-term impact is that the unemployment rate in 2011 is now expected to average 14.4% from 13.6% last year, albeit having probably peaked in recent months. BoI said the second data release showed that nominal GDP was deemed to have fallen by a massive 6.6% in just three months. The decline in real GDP was also a substantial 1.6%, driven by falling exports, contrary to the trend over the rest of the year.

As a result, the economy entered 2011 in a weaker state than most expected and as a consequence BoI also revised down its GDP growth forecast for the year to a modest 0.5%, in line with the latest consensus.

In the Bank of Ireland’s Quarterly Economic Outlook published today, Dr. Dan McLaughlin, group chief economist said: “The Irish labour market has been characterised by falling employment and a contracting labour force for the past three years but that pattern was partially arrested in the final quarter of 2010, as revealed in the Quarterly National Household Survey. The data showed that the labour force was broadly unchanged in the quarter when seasonally adjusted, in turn implying that the pace of net emigration had slowed appreciably, which is at variance with the widely held popular view that there is a substantial outflow of Irish nationals. Employment continued to fall, however, by 16,000 or 0.9%, with the result that the total unemployed jumped to 315,000 from 290,000 in the previous quarter, pushing the unemployment rate up to 14.7% from 13.7%. This was substantially higher than the previously published monthly estimates, (averaging 13.6% in Q4), with significant knock-on effects on the subsequent monthly data and on forecasts for this year as a whole."

IMF

The global economic recovery is gaining strength, with world growth projected at about 4½% in both 2011 and 2012, but unemployment remains high, and risks of overheating are building in emerging market economies, the IMF said in its latest forecast.

High commodity prices present new policy challenges, while old challenges --  fiscal and financial repair and reform and the rebalancing of global demand–remain work in progress.

“Given the improvement in financial markets, buoyant activity in many emerging and developing economies, and growing confidence in advanced economies, economic prospects for 2011–12 are good,” the IMF said in its April 2011 World Economic Outlook (WEO). However, disruptions to oil supply pose new risks to the recovery.

“Fears have turned to commodity prices,” said Olivier Blanchard, chief economist at the IMF. “Commodity prices have increased more than expected, reflecting a combination of strong demand growth and a number of supply shocks. These increases conjure the specter of 1970s-style stagflation, but they appear unlikely to derail the recovery,” he told a press conference in Washington.

Financial conditions fragile

Real GDP in advanced economies and emerging and developing economies is expected to expand by about 2½% and 6½%, respectively.

In the report released on April 11, it said financial conditions continue to improve after the global crisis, although they remain unusually fragile.

In many emerging market economies, demand is robust and overheating is a growing policy concern. Developing economies, particularly in sub-Saharan Africa, have also resumed fast and sustainable growth. But the IMF said new risks have emerged:

  • Rising food and commodity prices pose a threat to poor households, adding to social and economic tensions, notably in the Middle East and North Africa.

  • Oil prices have shot up because of unrest in the Middle East. The WEO said disruptions so far would have only mild effects on economic activity but, given falling spare oil production capacity, risks are on the downside.

  • The IMF said that the earthquake and tsunami in Japan had exacted a terrible human toll but that its global macroeconomic impact would be limited.

Many old challenges unaddressed

The IMF said many old policy challenges remain unaddressed even as new ones arise. In advanced economies, weak sovereign balance sheets and still-moribund real estate markets continue to present major concerns, especially in certain euro area economies.

Strengthening the recovery in advanced economies will require keeping interest rates low as long as wage pressures are subdued, inflation expectations are well anchored, and bank credit is sluggish. At the same time, public spending needs to be placed on a sustainable medium-term path by implementing fiscal consolidation plans and entitlement reforms, supported by stronger fiscal rules and institutions.

The WEO said this is particularly urgent in the United States to stem the risk of globally destabilizing changes in bond markets. “To make a sizable dent in the projected medium-term deficits, broader measures such as Social Security and tax reforms will be essential. “

It said that in Japan, the immediate budgetary priority was to support reconstruction. Once reconstruction efforts are under way and the size of the damage is better understood, attention should turn to linking reconstruction spending to a clear fiscal strategy for bringing down the public debt ratio over the medium term.

In the Eurozone, despite significant progress, markets remain apprehensive about the prospects of countries under market pressure. For them what is needed at the Eurozone level is sufficient, low-cost, and flexible funding to support strong fiscal adjustment, bank restructuring, and reforms to promote competitiveness and growth. More generally, the IMF says greater trust needs to be reestablished in Eurozone banks through ambitious stress tests and restructuring and recapitalization programs.

CNBC: IMF Upbeat on Global Economy:

Overheating concerns

The IMF said the challenge for many emerging and some developing economies is to ensure that present boom-like conditions do not develop into overheating over the coming year. Inflation pressure is likely to build further as growing production comes up against capacity constraints, with large food and energy price increases raising pressure for higher wages. The WEO published a chart showing countries in the Group of Twenty (G-20) with signs of overheating).

Source: IMF

Real interest rates are still low and fiscal policies appreciably more accommodative than before the crisis. Appropriate action differs across economies, depending on their cyclical and external conditions. However, a tightening of macroeconomic policies is needed in many emerging markets. Many emerging and developing economies will need to provide well-targeted support for poor households that struggle with high food prices, the IMF said.

The IMF said over the medium term, greater progress in advancing global demand rebalancing is essential to put the recovery on a stronger footing. This is will require action by many countries, notably fiscal adjustment in key economies with external deficits, and greater exchange rate flexibility and structural reforms that eliminate distortions and boost savings in key surplus economies.


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