The IMF’s Optimisitic Economic View Is Hardly Cause To Celebrate

The International Monetary Fund today joined the ever-increasing numbers of experts that argue that the worldwide economy is on the road to recovery.   Unfortunately, that’s like saying someone in a hospital is better because they are out of intensive care.  While technically true, they are still sick.

For one thing, the IMF’s forecast for global growth to slow 4 1/2 percent for 2011 and 2012 from 5 1/4% in early 2010 is not good news.   It indicates that the growth rates in the developed world will continue to be overshadowed by the soaring economies in the Third World such as China.   This is a far cry from the 1990s when the U.S.’s booming economy drove worldwide growth.  Not many experts see much cause for celebration.

“I think it’s a reasonable guess,” says David Wyss, chief economist at Standard & Poor’s,  in an interview, adding that the Chinese economy may not slow down as much as the Chinese suggest.   “Right now there is more risk than usual . …  There is more risk on the downside than the upside.”

The IMF points to a host of reasons to be optimistic including a resurgence in the stock market, robust corporate profits and a decline in joblessness in many industrialized counties such as the United States. Like all economic forecasts, the IMF’ is chock full of more caveats than a life insurance policy.  Investors should pay less attention to them the the media does.  IMF economists dole out their optimism by the spoonful.

“Demand for consumer durables may continue to recover faster than expected in advanced economies, as household saving rates stabilize and fears of job losses recede,” the report says. “This would be both good and bad news: activity would be stronger, but where household balance sheets are still weak, vulnerabilities would persist and global imbalances would widen again—that is, the sustainability of the recovery would not improve.”

That’s a fancy way of saying we don’t know if things are getting better.

In addition, the IMF points out that the usual suspects such as oil prices,  commodity prices and government deficits could impede economic growth.  The agency is understating the obvious.  For instance oil prices may rise even further unless the volatile situation in the Middle East dramatically improves.  Most countries also are ill-equipped to deal with the ramifications of $112 per barrel oil including gasoline prices that are so high that many drivers can’t afford to fill up their tanks.

Let’s not forget the instability caused by rising food prices which have caused riots around the world.   Moreover, nations such as Portugal, Ireland and Spain are drowning in debt.  Voters in Iceland overwhelmingly rejected a plan to repay creditors in the U.K. and the Netherlands 3.5 billion euros.  Then there’s the looming threat over the debt ceiling in the United States as well.

Though there are plenty of storm clouds on the economic horizon Tu Packard, a senior economist at Moody’s Analytics,  tells 24/7 Wall St. that she is optimistic that the recovery will be self- sustaining though she wouldn’t bet money on it.

“I would underline `cautiously optimistic’ ,” she says, adding that world trade figures and corporate profits are “terrific.”   “The rate (IMF) forecast is not strong enough to bring down unemployment in the world.”

–Jonathan Berr