16/7/2012: IMF downgrades growth prospects for 2012-2013

A notably interesting, if worrying, World Economic Outlook update from the IMF today. Titled “New Setbacks, Further Policy Action Needed” the document sounds several key warnings:

• In the past three months, the global recovery, which was not strong to start with, has shown signs of further weakness.
• Financial market and sovereign stress in the euro area periphery have ratcheted up, close to end-2011 levels.
• Growth in a number of major emerging market economies has been lower than forecast. …these developments will only result in a minor setback to the global outlook, with global growth at 3.5 percent in 2012 and 3.9 percent in 2013, marginally lower than in the April 2012 World Economic Outlook.
• 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.
• Clearly, downside risks continue to loom large, importantly reflecting risks of delayed or insufficient policy action. 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.

Some growth forecasts snapshots of the IMF update for 2012 and 2013:

• US gets downgraded on growth for both years by 0.1% from 2.1% in April 2012 to 2.0 in July 2012, and for 2013 from 2.4% to 2.3%.
• Meanwhile, Euro zone gets no change in 2012 forecast (at -0.3%) and a downgrade by -0.2% to 0.7% for 2013 forecast.
•  Let’s recall that Eurozone is Ireland’s ‘hope’ and ‘engine for growth’ according to our Government. And it is expected to perform markedly worse than any other advanced region in both 2012 and 2013. 
•  Note that the most ‘dynamic’ large euro zone economy – Germany – is now expected to grow by a ridiculously low 1.4% in 2013 on top of an absurdly low 1.0% in 2012.
• Elsewhere, China and India both got seriously downgraded in terms of growth prospects for 2012 and 2013 compared to IMF forecasts 3 months ago.

Chart below shows some monetary and banking sides of the euro crisis.

“Overall, global growth is projected to moderate to 3.5 percent in 2012 and 3.9 percent in 2013, some 0.1 and 0.2 percentage point, respectively, lower than forecast in the April 2012 WEO…

Growth in advanced economies is projected to expand by 1.4 percent in 2012 and 1.9 percent in 2013, a downward revision of 0.2 percentage point for 2013 relative to the April 2012 WEO. The downward revision mostly reflects weaker activity in the euro area, especially in the periphery economies, where the dampening effects from uncertainty and tighter financial conditions will be strongest.”

“Growth in emerging and developing economies will moderate to 5.6 percent in 2012 before picking up to 5.9 percent in 2013, a downward revision of 0.1 and 0.2 percentage point in 2012 and 2013, respectively, relative to the April 2012 WEO… Growth is projected to remain relatively weaker than in 2011 in regions connected more closely with the euro area (Central and Eastern Europe in particular).”