IMF downgrades global growth on concerns about recovery

The IMF slashes its global growth forecasts, setting a tone for the IMF-World Bank 2012 annual meetings in Tokyo this week.
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The IMF's Olivier Blanchard
<div style="text-align: left;"> The IMF's Olivier Blanchard </div>

The IMF expects the global economy to grow 3.3% this year and 3.6% in 2013, with a slump in world trade hurting emerging markets and developing countries, according to its latest World Economic Outlook, released ahead of the annual meetings that kick off today.

“Low growth in advanced economies is affecting emerging and developing economies through exports,” Olivier Blanchard, economic counsellor and director of the research department at the IMF, told a press conference in Tokyo yesterday.

“As was the case in 2009, trade channels are surprisingly strong, with, for example, lower exports accounting for most of the decrease in growth in China, and through supply chains, much of the decrease in growth is in Asia.”

He pointed out that the world economic recovery is continuing, but at a weaker rate — in advanced economies, growth is now too low to make a substantial dent in unemployment, while in major emerging markets, previously strong growth has also decreased.

Compared to its forecast a few months ago, the IMF now expects advanced countries will grow 1.5%, from the previous projection of 1.8%, in 2013, and emerging and developing countries will grow 5.6%, instead of 5.8%, according to the economist.

As for the global economic outlook, the latest figures represent a downward revision from the July forecast of 0.2 percentage points for this year and 0.3 point for 2013. Central banks’ accommodative monetary policy is the main force pulling up growth, it said, but fiscal consolidation and a still-weak financial system are pulling in the opposite direction.

The downward revisions are widespread, Blanchard explained, particularly for two groups of countries: the members of the euro area and three of the large emerging-market economies — China, India and Brazil.

The IMF expects the euro area’s growth will be almost flat in 2013, while China is projected to grow 7.8% this year and 8.2% in 2013 — a downward revision of 0.2 percentage points for both years from its July forecast. It also said there are some home-grown woes, such as policy uncertainty in India and tighter policies in Brazil.

But Blanchard said that the IMF does not see these developments in China, India and Brazil as signs of a hard landing in any of these countries, although they will likely face lower growth for some time.

In China, the downward revision mainly reflects weaker external demand, but the authorities have already responded appropriately by lowering interest rates — both lending and deposit rates — the economist said. Accelerated spending and infrastructure investment will also provide a boost, and under these conditions, growth should gradually pick up, he added, although if the global economy were to slow much more, additional policy measures will be needed.

The IMF favours using fiscal policy in China to stimulate investment and support rebalancing towards consumption in the medium term, he said. “Such policy support will also be consistent with the global demand rebalancing and China’s contribution to reducing global imbalances.”

On the global economy, the new element now is uncertainty about policy both in Europe and the US, Blanchard said, and in the short term, more immediate measures are needed. He noted that Spain and Italy must follow through with adjustment plans that re-establish competitiveness and fiscal balance, as well as maintaining growth.

“If the measures which have been promised are delivered in the case of Europe, and if the US avoids a fiscal cliff, one can be relatively optimistic about the future,” he added.

More than 10,000 central bankers, ministers of finance and development, private sector executives, academics and journalists are gathered in the Japanese capital to discuss global economic issues at this week’s IMF-World Bank annual meetings.

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