Economics

Posted in: Economics
IMF - World Economic Outlook January 2009
By AMP
Jan 29, 2009 - 10:30:00 AM

The IMF in its January 2009 Outlook report, says that, global growth in 2009 is expected to fall to ½ percent when measured in terms of purchasing power parity and to turn negative when measured in terms of market exchange rates.  The IMF adds that the global economy is projected to experience a gradual recovery in 2010, with growth picking up to 3 percent.  This statement is, however, qualified by noting that the outlook is highly uncertain, and that "the timing and pace of the recovery depends critically on strong policy actions."

The IMF is pessimistic about the outlook for financial markets, saying that, "Financial markets are expected to remain strained during 2009. In the advanced economies, market conditions will likely continue to be difficult until forceful policy actions are implemented to restructure the financial sector, resolve the uncertainty about losses, and break the adverse feedback loop with the slowing real economy. In emerging economies, financing conditions will likely remain acute for some time—especially for corporat  sectors that have very high rollover requirements."

The report states that global output and trade plummeted in the final months of 2008.   The IMF also noted that, "The continuation of the financial crisis, as policies failed to dispel uncertainty, has caused asset values to fall sharply across advanced and emerging economies, decreasing household wealth and thereby putting downward pressure on consumer demand."  The IMF also states that, "The slump in global demand has led to a collapse in commodity prices." 

While encouraging policies which provide economic and financial stimulus, the IMF states that, "policy efforts so far have addressed the immediate threats to financial stability (through liquidity support, deposit insurance, and recapitalization schemes), but they have done little to resolve the uncertainty about the long-term solvency of financial institutions. The process of loss recognition and restructuring of bad loans is still incomplete."  The IMF also says that, In current circumstances, the timely implementation of fiscal stimulus across a broad range of advanced and emerging economies must provide a key support to world growth."  The projections made by the IMF assume strong and coordinated policy actions, and the IMF says that, "any delays will likely worsen growth prospects."

The IMF projections for 2009 are that all the advanced economies will see a decline in economic activity ranging from 2.8% in the UK, 2.6% in Japan, 2.5% in Germany, 2% in France, 1.9% in France, 1.7% in Spain and 1.2% in Canada. If prompt stimulus is applied the IMF see all the advanced economies coming out of economic decline in 2010, but with growth being static. The IMF imply that the reality may be worse if government measures to stimulate economies are not effective.  Given the rapid decline in the world economic outlook in the last three months there are no guarantees that the IMF projections will reflect reality on the ground, the strength of the decline in economic activity and the collapse of trade and community prices has the potential to strength the negative feedback mechanisms in the global economy.  There is one figure in their 2009 projections that I seriously doubt, they believe that China's economy will grow by 6.7% in 2009, from recent reports of the collapse of production and exports (in part due to the lack of trade finance) I think that it is unlikely that China will avoid a contraction in its economy this year.  Changes in exchange rates will in any case modify the actual numbers for all countries, except the USA, and may have a particularly strong impact on the Euro Zone and China, both of which have over-valued currencies.

I, personally, also doubt the recovery (which will of course be at a lower level of activity than that at the beginning of 2009) will occur in 2010, it is possible that this may run for another two or three years, in which case the shape of the global economy would be very different.