Mushtak Parker Saudi Gazette LONDON – The global economic recovery has suffered new setbacks, and uncertainty weighs heavily on the outlook, the International Monetary Fund (IMF) said in the latest quarterly update of its “World Economic Outlook” that was released Monday ahead of its twice-yearly meeting, which started in Tokyo Tuesday. Global output is expected to remain sluggish in advanced economies but still relatively solid in many emerging market and developing economies. The IMF forecast that the world economy will expand 3.3 percent this year, down from the estimate of 3.5 percent growth it issued in July. Its forecast for growth in 2013 is 3.6 percent, down from 3.9 percent three months ago and 4.1 percent in April. In the latest report, the IMF calculated a 17 percent probability that global growth falls to 2 percent in 2013, which would mean a recession in wealthy nations and “serious slowdown” in emerging nations. In April, the IMF put the chance of such an outcome at 4 percent. The IMF defines recession as a decline in real per-capita GDP, along with weaknesses in other indicators including industrial production, trade, capital flows and joblessness. The IMF said growth for developing Asia would come in at 6.7 percent this year and 7.2 percent in 2013. That compares with July's estimate of 7.1 percent this year and 7.5 percent next year. China's economy, a key driver of regional growth, will see just 7.8 percent expansion this year, the IMF warned, but 8.2 percent next year as easing measures kick in. Underpinning that bleaker scenario are the assumptions that Europe will continue to ease monetary policy and that the US will avert a crushing blow to growth by fending off a so-called “fiscal cliff” that could result from a failure to reach a compromise on its budget law and tax cuts. A key reason is that policies in the major advanced economies have not rebuilt confidence in medium-term prospects. Tail risks, such as those relating to the viability of the euro area or major US fiscal policy mistakes, continue to preoccupy investors. Unemployment is likely to stay elevated in many parts of the world. And financial conditions will remain fragile, according to the October 2012 Global Financial Stability Report (GFSR). The WEO forecast rests on two crucial policy assumptions. The first is that European policymakers – consistent with the GFSR's baseline scenario – will adopt policies that gradually ease financial conditions further in periphery economies. In this regard, the European Central Bank (ECB) has recently done its part. It is now up to national policymakers to move and activate the European Stability Mechanism (ESM), while articulating a credible path and beginning to implement measures to achieve a banking union and greater fiscal integration. The second assumption is that US policymakers will prevent the drastic automatic tax increases and spending cutbacks (the fiscal cliff) implied by existing budget law, raise the US federal debt ceiling in a timely manner, and make good progress toward a comprehensive plan to restore fiscal sustainability. The WEO forecast could once again be disappointed on both accounts. More generally, downside risks have increased and are considerable. The IMF staff's fan chart, which uses financial and commodity market data and analyst forecasts to gauge risks, suggests that there is now a 1 in 6 chance of global growth falling below 2 percent, which would be consistent with a recession in advanced economies and low growth in emerging market and developing economies. Ultimately, however, the WEO forecast rests on critical policy action in the euro area and the United States, and it is very difficult to estimate the probability that this action will materialize. Moreover, the report further said governments need to do more to relieve the burden of household debt that is constraining spending power and thus crippling demand. While large corporations pay record low rates for credit, households and small companies struggle to obtain bank loans, it said. Fortifying domestic demand is all the more crucial given weakening trade trends. The IMF forecast that growth in world trade volume will slump to 3.2 percent this year from 5.8 percent last year and 12.6 percent in 2010. “Low growth and uncertainty in advanced economies are affecting emerging market and developing economies through both trade and financial channels, adding to homegrown weaknesses,” IMF's chief economist Olivier Blanchard said. In the Middle East, WEO noted that differences in the economic performance of oil exporters and oil importers have widened. “Higher government spending in most oil exporters has supported robust growth. Elsewhere, uncertainties from political and economic change after the Arab Spring, slowing growth in major trading partners, and in some cases, internal conflict, have led to a marked weakening in activity. For oil importers, the policy priority will be preserving or rebuilding macroeconomic stability while defining and implementing a reform agenda to accelerate growth. For oil exporters, the priority is to take advantage of current high oil prices to diversify their economies,” the report said. The good news is that while GDP growth in the Middle East and North Africa (MENA) region was relatively subdued at 3.25 percent in 2011, it is projected to strengthen to 5.25 percent in 2012. Growth in oil exporters is expected to accelerate from about four percent in 2011 to 6.5 percent in 2012, largely as a result of a strong rebound of activity in Libya since late 2011. In most other oil exporters, non-oil GDP growth is expected to remain robust in 2012. In contrast, growth in oil importers has been about 1.25 percent during 2011-12, reflecting the effects of social unrest and political uncertainty, weak external demand, and high oil prices. Uncertainty and unrest have led to a pullback from the region, evidenced most dramatically in steep declines in tourism and foreign direct investment. Looking forward, uncertainty is expected to decrease as political transitions stabilize, while external demand picks up, and growth in oil importers is projected to recover to 3.25 percent in 2013.
