Policy Actions Improve Prospects for Global Economy: IMF

 

(Global growth for 2013 is projected to reach 3.3%, which will accelerate to 4% by 2014, even as India is estimated to grow at 5.7% in 2013 and 6.2% in 2014 as against 4% in 2012.)

 

According to the World Economic Outlook (WEO) published by International Monetary Fund (IMF), during the past six months global economic conditions have improved. Advanced economy policymakers successfully defused two of the biggest short-term risks to global activity- the threat of a euro area breakup and a sharp fiscal contraction in the United States. Financial markets have rallied in response, and financial stability has improved.

WEO reports that the global economy is expected to continue mending gradually, and forecasts real global GDP growth of 3.3%  in 2013, about the same as the 3.2% growth seen in 2012, and expects that the growth will rise to 4% in 2014.

The WEO says the main reason behind the broadly unchanged growth prospects this year is that advanced economies have not all benefited to the same extent from the improved financial market conditions and confidence. In advanced economies, there appears to be a growing bifurcation between the United States on the one hand and the euro area on the other, but emerging market and developing economies (EMDEs) are still going strong.

United States- With increasingly robust private demand, growth in the US is projected to be 1.9% in 2013, despite a major fiscal tightening, and accelerate to 3% in 2014. Weak growth in the fourth quarter of 2012 reflected the unwinding of a spurt of inventory investment and defense spending during the third quarter. Preliminary indicators suggest that private demand remained resilient this year, but across-the-board public spending cuts are expected to take a toll on the recovery going forward.

Euro Area- Growth in the euro area is forecast to be –0.3% in 2013 and 1.1% in 2014. Germany’s growth is strengthening but is still forecast to be less than 1% in 2013. France’s growth is forecast to be negative in 2013, reflecting a combination of fiscal consolidation, poor export performance, and low confidence. Italy and Spain are expected to have substantial contractions in 2013. Activity in the euro area will pick up very gradually, helped by appreciably less fiscal drag and some easing of lending conditions. However, output will remain subdued because of continued fiscal adjustment, financial fragmentation, and ongoing balance sheet adjustments in the periphery economies.  Additionally, better financial conditions are not yet passing through to companies and households because banks are still hobbled by poor profitability and low capital.

Japan- A new fiscal and monetary policy, based on aggressive quantitative easing, a positive inflation target, fiscal stimulus, and structural reforms, is expected to drive a rebound in nation’s activity, with real GDP growth reaching 1.5% in 2013. According to WEO projections, growth will soften only slightly in 2014 as private demand continues to garner speed, helped by aggressive new monetary easing offset by the winding down of the stimulus and the consumption tax increase.

Emerging market and developing economies- Growth in EMDEs is expected to remain robust, strengthening from about 5% in 2012 to 5.3% in 2013 and 5.7% in 2014. Activity in most of these economies has already picked up after a slowdown in 2012, thanks to resilient consumer demand, supportive macroeconomic policies, and a revival of exports.

China- Growth has already returned to a healthy pace in China. The country’s growth is set to accelerate slightly to about 8% in 2013, reflecting continued robust domestic demand in both consumption and investment and renewed external demand. Inflation will pick up only modestly to an average of 3% in 2013.

India- Growth will rise in India to 5.7% in 2013 and 6.2% in 2014 as a result of improved external demand, solid consumption, a better monsoon season and recently implemented pro-growth measures. Significant structural challenges will likely lower potential output over the medium term and also keep inflation elevated by regional standards.

Brazil- Activity is expected to recover in Brazil, in response to the large policy rate cuts deployed during the past year as well as to measures targeted at boosting private investment.

Emerging Europe-In emerging Europe, the recovery should gain speed as demand from advanced economies in Europe picks up.

Sub-Saharan Africa- Activity in sub-Saharan Africa is forecast to remain robust, with both resource-rich and lower-income economies benefiting from robust domestic demand.

Middle East and North Africa-A pause in oil production growth among oil-exporting countries is expected to lead to a temporary deceleration in the region’s economic growth, while ongoing political transitions and a difficult external environment are preventing a quicker recovery in some oil-importing countries.

IMF Projections  (Percentage change)

                              Source: IMF


Stabilization requirement for robust growth — However, old dangers remain and new risks have come to the fore. In the short term, risks mainly relate to developments in the euro area, including uncertainty about the fallout from events in Cyprus and politics in Italy as well as vulnerabilities in the periphery. In the medium term, the key risks relate to adjustment fatigue, insufficient institutional reform, and prolonged stagnation in the euro area as well as high fiscal deficits and debt in the US and Japan. In this setting, policymakers cannot afford to relax their efforts. In advanced economies, the right macroeconomic approach continues to be gradual. The US and Japan still need to devise and implement strong medium-term fiscal consolidation plans. The euro area needs to strengthen the Economic and Monetary Union (EMU). In emerging market and developing economies, some tightening of policies appears appropriate in the medium term. This tightening should begin with monetary policy and be supported with prudential measures as needed to rein in budding excesses in financial sectors.

Warm regards,

Dr. S P Sharma
Chief Economist