IMF Forecasts More Weakness in Global Economy

In one of the periodic updates to its 2012 World Economic Outlook, the International Monetary Fund (IMF) said today that global economic growth in 2013 will decline from a previous estimate of 4.1% to 3.9%. The growth estimate for 2012 fell from 3.6% to 3.5%. The IMF noted:

These forecasts, however, are predicated on two important assumptions: that there will be sufficient policy action to allow financial conditions in the euro area periphery to ease gradually and that recent policy easing in emerging market economies will gain traction. …

In Europe, the measures announced at the European Union (EU) leaders’ summit in June are steps in the right direction. The very recent, renewed deterioration of sovereign debt markets underscores that timely implementation of these measures, together with further progress on banking and fiscal union, must be a priority. In the United States, avoiding the fiscal cliff, promptly raising the debt ceiling, and developing a medium-term fiscal plan are of the essence. In emerging market economies, policymakers should be ready to cope with trade declines and the high volatility of capital flows.

In other words, everything that the European Union, the United States and emerging markets have been unable to accomplish in the past four years needs to happen now. Sometimes one has to wonder if some of these folks still believe in the tooth fairy.

Despite the impact of the eurozone agreement on equity prices, the situation in Europe is no closer to a real settlement than it has ever been. In the U.S., a political fight over the debt ceiling and the automatic budget cuts due in December are virtually inevitable given that elections are looming. As for emerging markets, Brazil, India and China have all slowed their growth, either deliberately or not, and all are vulnerable to financial market volatility.

Still, the top priority is the resolution of the eurozone’s financial crisis. The IMF says:

[O]nce the agreed-upon single supervisory mechanism for euro area banks is established, the European Stability Mechanism (ESM) would be able to recapitalize banks directly.

That’s true, of course, but establishing the “single supervisory mechanism” is not a slam dunk. The IMF acknowledges that a tighter banking and fiscal union among eurozone members is critical to achieving stability because, without it, the eurozone at the end of 2012 will be virtually identical with the eurozone at the end of 2011, except weaker and more disorganized, with a single currency that loses value every day.

The full text of the update is available here.

Paul Ausick