IMF cuts 2012 global growth forecast to 3.3%

The IMF has revised down its forecast for growth this year to 3.3% and 3.6% in 2013 saying that recovery has suffered new setbacks and uncertainty weighs heavily on the outlook.

IMF Economic Counsellor and Director Research Oliver Blanchard told a media briefing on the World Economic Outlook ahead of 2012 annual meetings in Tokyo that the world economy recovery continues but it has weakened further.

Relative to IMF’s April forecast, the growth estimate for 2013 has been revised from 1.8% down to 1.5% for advanced countries and from 5.8% down to 5.6% for emerging and developing countries.

“In advanced countries growth is now too low to make a substantial dent in unemployment. In major emerging countries growth that was strong earlier has declined as well,” Blanchard said.

He also said fiscal consolidation and weak financial system continue to pull down growth in advanced economies. Growth driver was accommodative monetary policy with many central banks maintaining low policy rates.

Focusing on financial system, he said it is still not functioning efficiently. “In many countries especially in Europe and US banks are still weak and their prospects are made worse by low growth,” Blanchard said about the WEO October release titled “Coping with high debt sluggish growth.”

As per the IMF WEO, low growth in advanced countries is affecting emerging and developing economies through exports. Adding to this were some “home grown woes” of developing countries.

Blanchard said countries need to continue with accommodating monetary policy which he described as a “very powerful force” for growth. This must be supported with fiscal consolidation and sound financial system.

The WEO October release said the global economy has deteriorated further since the release of the July 2012 WEO Update, and growth projections have been marked down. Downside risks are now judged to be more elevated than in the April 2012 and September 2011 WEO reports.

Global growth slowed again during the second quarter of 2012 after rebounding during the first.

The slowing has been observed in all regions.

This synchronicity suggests an important role for common factors, many of which reflected wide-ranging spillovers from large country-specific or regional shocks. A first shock was the ratcheting up of financial stress in the euro area periphery in the second quarter. Second, domestic demand in many economies in Asia and Latin America (notably Brazil, China, and India, but also others) slowed, owing not just to weaker external demand from Europe but also to domestic factors. Growth also decelerated in the United States.

Growth continued to moderate in much of Asia during the first half of 2012. Slower growth in import demand in most advanced economies corresponded with weaker export growth in Asia.

Growth in China slowed further in the second quarter of 2012, as the economy continued to adjust to the policy tightening undertaken in 2010–11.

The tightening of monetary and credit policies has been partly reversed in 2012, as price pressures have eased and the residential real estate market has cooled.

This easing, however, has not yet gained the traction expected earlier in the year.

Slowing growth in China has affected activity in the rest of Asia, a consequence of the deepening of linkages throughout the region in the past decade.

In other parts of Asia, activity was boosted by recovery from natural disasters and reconstruction, notably in Japan and Thailand, but also in Australia and New Zealand. In Australia, continued strong mining activity and related investment have also supported growth. In India, growth weakened more than expected in the first half of 2012, an outcome of stalled investment caused by governance issues and red tape, and a deterioration in business sentiment against the backdrop of a rising current account deficit and the recent rupee depreciation.

Compared with the region’s growth performance in recent years, the near- and medium-term outlooks are less buoyant.

This view reflects weaker anticipated external demand resulting from the tepid growth prospects in major advanced economies and a downshift in China’s and India’s growth prospects, with a return to double-digit growth in China unlikely.

WEO said in developing Asia, real GDP is forecast to accelerate to a 7.25% pace in the second half of 2012.

The main driver will be China, where activity is expected to receive a boost from accelerated approval of public infrastructure projects.

The outlook for India is unusually uncertain: For 2012, with weak growth in the first half and a continued investment slowdown, real GDP growth is projected to be 5%, but improvements in external conditions and confidence-helped by a variety of reforms announced very recently-are projected to raise real GDP growth to about 6% in 2013.

Overall WEO said downside risks have increased relative to the April 2012 WEO and also have important global spillover potential.

The most immediate downside risk—that delayed or insufficient policy action will further escalate the euro area crisis—remains in place. Other short-term risks are the looming US “fiscal cliff” and delays in raising the U.S. debt ceiling.

A medium-term risk is the possibility of lower than-expected growth in many major economies and regions, including China, because of lower medium term growth potential and temporarily higher global risk aversion.

A key issue is whether the global economy is just hitting another bout of turbulence in what was always expected to be a slow and bumpy recovery or whether the current slowdown has a more lasting component. The answer depends on whether European and US policymakers deal proactively with their major short-term economic challenges.

The WEO forecast assumes that they do, and thus global activity is projected to reaccelerate in the course of 2012; if they do not, the forecast will likely be disappointed once again. For the medium term, important questions remain about how the global economy will operate in a world of high government debt and whether emerging market economies can maintain their strong expansion while shifting further from external to domestic sources of growth.

It said a basic challenge for policymakers is to move away from an incremental approach to policymaking and address the many downside risks to global activity with strong medium-term fiscal and structural reform programs in order to rebuild confidence.

Policymakers in emerging market and developing economies will need to balance two priorities: rebuilding policy buffers so as to maintain hard-won increases in the resilience of their economies to

shocks and supporting domestic activity in response to growing downside risks to external demand.