Download Market Focus –IMF calls for rebalancing of world growth

Market Focus – IMF calls for rebalancing of world growth
October 2010
IMF global growth little changed in aggregate
♦ The October World Economic Outlook forecast from the IMF contained no significant downgrades to previous
projections, despite double-dip concerns and the deterioration in the economic data since July. Global growth
for 2010 was revised up by 0.2% to 4.8%, while the 2011 number was marginally lower at 4.2%.
♦ Within the Advanced G20, significant downgrades to the US numbers were partially offset by upgrades to
Europe. Repeating the same message as in July, the IMF believes that wherever possible high deficit advanced
countries should make an early start in cutting their budget deficits.
♦ Although the emerging nations have relied on strong domestic consumption over the past year, the IMF thinks
they will find it harder to compensate for weaker external demand from the advanced G20 economies in 2011.
There is still an urgent need for them to rebalance their economies away from exports by further
strengthening domestic demand.
♦ The Asian region is expected to grow by 6.7% in 2011, a moderate drop from this year’s 7.9%. China’s
economic growth remains crucial to both the world and Asia. Here a slowing to 9.6% from 10.5% in 2010
reflects the IMF's expectation of a 'soft landing' for China, unchanged from their previous forecast.
♦ Many of the fiscal stimulus packages, including that of the US, will be close to being spent by the end of this
year. However, private sector demand has yet to accelerate enough to take up the slack. Olivier Blanchard,
the IMF’s chief economist, called on the advanced economies to keep monetary policy supportive of private
sector demand. Unlike the Fed, however, the IMF sees limits to what more can be expected from monetary
policy.
♦ To stimulate private demand the IMF recommends measures to raise productivity and improve the investment
environment. Projections for continued high unemployment, low capacity utilization, difficulty in obtaining
credit and slow financial sector reform could hamper what government's can achieve from such efforts in the
next year or so.
IMF World Economic Outlook: GDP predictions through 2015 in USD bn and %
Country/Group
2008
2009
2010
2011
2012
2013
2014
2015
Advanced
Economies
Emerging
Economies
42,187.9
0.24
18,999.2
39,881.4
-3.23
17,962.0
41,197.7
2.71
20,765.7
42,660.3
2.17
22,757.1
44,303.2
2.64
24,821.8
46,049.2
2.59
27,062.4
47,906.5
2.51
29,498.5
49,813.6
2.41
32,149.3
6.01
4,519.9
9.60
14,369.08
0.00
18,377.1
2.51
4,984.7
9.10
14,119.05
-2.63
16,414.7
7.07
5,745.1
10.50
14,624.18
2.64
16,106.9
6.44
6,422.3
9.59
15,157.29
2.31
16,452.1
6.52
7,169.7
9.54
15,824.69
3.04
17,023.7
6.58
8,000.5
9.49
16,525.59
2.90
17,653.7
6.65
8,935.7
9.47
17,267.50
2.75
18,319.9
6.66
9,982.1
9.45
18,029.32
2.59
18,997.2
0.76
-4.10
1.65
1.70
2.12
2.22
2.24
2.17
China
United States
European Union
Source: IMF, World Economic Outlook database, October 2010.
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IMF policy prescriptions – the need for rebalancing
♦ As for policy prescriptions, the IMF's latest advice seems a bit contradictory. For example, the Fund
recommends those countries that can do so to continue with fiscal tightening this year, beginning the long
task of cutting public sector debt. However, it qualified that advice by saying that if growth begins to stall,
then these countries should not be afraid to increase fiscal stimulus once more in 2011.
♦ Since May the IMF has been promoting ‘‘growth friendly’’ fiscal consolidation as one means whereby policy
cooperation amongst the G20 level could result in a more favorable upside scenario for the world economy.
This rather counterintuitive term includes policy measures such as switching from direct taxes (payroll taxes)
to indirect taxes (VAT/sales taxes), cutting out government waste, implementation of structural reforms, etc.
♦ What is evident from the Washington October meetings, however, is that the crisis is well and truly over from
the perspective of any imaginative coordinated G20 policy response to sustain the upturn in 2011 and beyond.
As Pimco CEO Mohammed El-Erian said recently in the 2010 Per Jacobsson Lecture, G20 leaders are now in
danger of "losing the peace" after "winning the war."
♦ The overarching policy theme of the IMF annual meetings this year is that world economies need to be
rebalanced, both internally and externally. Internally, countries with large surpluses, including emerging
economies, need to stimulate their domestic demand. To this end, the IMF recommends further development
of EM financial sectors so that a larger percentage of their populations can more easily access credit. On the
other hand, major deficit nations (i.e., the US, UK) need to improve productivity and implement fiscal
consolidation measures.
♦ Externally, the need to rebalance is becoming even starker. David Shairp, global strategist for JP Morgan Asset
Management's Global Multi-Asset Group put it well in the latest GMAG monthly investment outlook when he
wrote "It is problematic that the 2nd, 3rd and 34th largest economies (China, Japan and Germany) are all
running large external surpluses, leaving the largest (the US) as the consumer and debtor of last resort."
Finally, there continues to be a focus on the IMF’s need for internal rebalancing, as emerging nations called
for a greater say and more power within the organization.
♦ Conclusion --- The IMF believes that the world economy will slowly continue its gradual, fragile recovery.
But at the same time the Fund remains wary of the possibility of further shocks, including pressures for
competitive devaluation, sovereign debt problems, or too slow a restructuring of the financial sector.
The political will for further coordinated fiscal and monetary policy responses has evaporated and
policy frictions between G20 members can be expected to increase as growth slows in 2011.
Policymakers will have their hands full rebalancing the world economy
if these IMF forecasts prove accurate!
World Economic Outlook: Current Account Balance
Predictions
Unemployment Outlook for Advanced Economies
9
1000
8
800
7
USD, billions
600
6
400
200
China
United States
0
-200
2008
2009
2010
2011
2012
2013
2014
2015
5
Unemployment %
4
3
-400
2
-600
1
-800
0
Year
2008
2009
2010
2011
2012
2013
2014
2015
Source: IMF, World Economic Outlook database, October 2010.
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