IMF Increases World Economy Growth Forecast

The IMF (International Monetary Fund) increased its forecast for global economic growth to 4.5% for this year and 4.25% for 2011. The agency added a major set of cautions:

“Despite the stronger than expected first half recovery, the IMF warned that uncertainties surrounding sovereign and financial sector risks in parts of the euro area could spread more widely, posing difficulties for both financial stability and the economic outlook.”

But, what does the IMF know?The improvement in GDP growth is based on several assumptions that are hard to prove and could easily be wrong. That may be why the agency has so significantly hedged its predictions. The first assumption is that the US economy will improve by 3.25% this year. There are many factors that could make that number much too optimistic. One is that the American stimulus package shows little signs that it has worked. Congress has no appetite to increase its investment to improve the economy. Many politicians believe that plans to help the economy, even by extending unemployment benefits, could be political suicide. Unemployment in America is likely to remain between 9% and 10%, according to most federal government numbers. The rate of exports to Europe could falter as the economy of that region deteriorates.

The IMF says its expects GDP growth of 1% in the euro zone. The forecast could be much too high as governments in the region enact austerity programs and increase taxes. The tax increases could hurt company profits and consumer spending. The end to entitlement programs will almost certainly put more consumers below the poverty line, and large layoffs of government workers will swell the ranks of the unemployed.

The most daring IMF forecast is for Asia, which means it is a de facto forecast for China,  where the agency expects 6.25% growth this year. There is a great deal of data that shows the Chinese economy peaked in the first quarter and that its exports and manufacturing output are slowing rapidly. Repricing the yuan could also affect the People’s Republic’s exports. There is a greater chance of trade sanctions against the country if the efforts to bring the currency into line with Western expectations do not work.

If wishes were horses, all the beggars would ride.

Douglas A. McIntyre