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Risks of Global Downturn Have Increased, Says IMF

By Valentin Schmid
Epoch Times Staff
Created: October 10, 2012 Last Updated: October 13, 2012
Related articles: Business » Economy & Trade
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Shoppers walk down the Third Street Promenade's outdoor shopping mall on August 17, 2012 in Santa Monica, California. The IMF states in its World Economic Outlook that the global economy is at an increased risk of slowing. (Kevork Djansezian/Getty Images)

Shoppers walk down the Third Street Promenade's outdoor shopping mall on August 17, 2012 in Santa Monica, California. The IMF states in its World Economic Outlook that the global economy is at an increased risk of slowing. (Kevork Djansezian/Getty Images)

The global economy is at an increased risk of slowing, according to the IMF’s semiannual World Economic Outlook (WEO) released in Tokyo, Oct. 9.

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

The fund is especially concerned about growth in developed markets, but the United States is in relatively better shape than Europe, for example. The fund expects the U.S. economy to grow at a pace of 2.2 percent for 2012 and accelerate mildly to 2.75 percent in 2013, a pace that is commonly referred to by economists as “stall speed” and below the trend growth rate, which most analysts say is higher than 3 percent, given the productive capacity of the United States. This forecast is under the assumption that U.S. politicians will find some sort of solution for the current fiscal dilemma.

Japan is also expected to do reasonably well, growing 2.2 percent in 2012 in the wake of post-earthquake reconstruction spending. Once this extraordinary expenditure runs out, growth is expected to come down to 1 percent in the first half of 2013.

Eurozone GDP, however, is expected to decline 0.4 percent for 2012, reversing into very low growth below 1 percent next year, and even this less than sparkling prediction comes with the significant caveat that eurozone leaders will find some sort of solution for the eurocrisis. All other regions in the world are expected to add more than 3 percent to growth in 2012, but almost all estimates have been revised down, as problems such as fiscal consolidation and “a weak financial system” in developed markets slow down trade and drag down faster growing economies such as India and China with them. Global growth is expected to come in at 3.3 percent this year.

IMF Examines Optimistic Calculations 

“The main finding, based on data for 28 economies, is that the multipliers used in generating growth forecasts have been systematically too low since the start of the Great Recession,” reads a relatively innocent statement in Box 1.1 of Chapter One of the WEO report. 

The implications, however, are profound, as most governments have been reducing fiscal expenditures, especially in Europe. The IMF has always implicitly assumed that a reduction of 1 percent in spending will shrink GDP by 0.5 percent. The new study, however, shows that multipliers are actually in the range of 0.9 percent to 1.7 percent and even worse, they pick up the more the expenditure is being reduced. 

Governments in Europe in particular have recently announced in their budgets that they will accelerate fiscal consolidation. If the findings by the IMF are indeed correct, growth for most European economies would be overstated and the market could be surprised by lower growth in Europe. The same argument could gather further momentum in the United States, should there be no resolution for the fiscal dilemma and automatic spending cuts kick in, which could be as large as 0.5 percent of GDP according to the Congressional Budget Office.

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