–IMF WEO Update: Global Growth Revised Up 0.2 pt to 4.4%, 5.0% 2010
–2011 US GDP Estimate Revised Up 0.7 pt To 3.0% Vs October Est.
–Monetary Accommodation Needs To Continue In Advanced Economies
–IMF GSFR: Increase Size of European Financial Stability Facility
–IMF WEO Raises 2011 Oil Price Projection to $90/Bbl vs $79 Previous
By Brai Odion-Esene
WASHINGTON (MNI) – The International Monetary Fund Tuesday made an
upward revision to its projection for global growth this year, citing
stronger-than-expected activity in the second half of 2010 as well as
the boost to the economy from the new fiscal package passed in the
United States late last year.
In its January update of its World Economic Outlook, the IMF
warned, however, that downside risks to the recovery “remain elevated,”
while it noted separately in its Global Financial Stability Report that
the time bought with the extraordinary support measures of the past few
years “is running out.”
The GSFR said the size of the European Financial Stability Facility
should be expanded and that the ECB should continue making liquidity
available to those who need it. The WEO also called on advanced
economies to keep monetary accommodation in place, while emerging
economies with overheating pressures should do the opposite and begin or
continue tightening measures.
According to the updated report, the two-speed recovery continues.
Activity has moderated less than expected in advanced economies, but
growth remains subdued and unemployment is still high, with “renewed
stresses in the euro area periphery are contributing to downside risks.”
In many emerging economies on the other hand, the report noted that
activity remains buoyant, inflation pressures are emerging, and there
are now some signs of overheating, driven in part by strong capital
inflows.
The WEO now projects world output to grow by 4.4% in 2011, up 0.2
points from the October 2010 WEO estimate. After predicting the global
economy would expand by 4.8% in the last WEO, the IMF revised that
figure up to 5.0% in Tuesday’s report.
Activity in the advanced economies is projected to expand by 2.5%
during 2011-12, and although insufficient to make a significant dent in
high unemployment rates, it is an upward revision of 0.25 percentage
point relative to the previous WEO. That is “mostly due to a new fiscal
package passed in late 2010 in the United States that is expected to
boost economic growth this year by 0.5%,” the report said.
It added that a package with a similar growth impact passed in
Japan is expected to sustain a moderate recovery in 2011. And although
growth in the periphery of the euro area is marked down for this year,
this is offset by an upward revision to growth in Germany, due to
stronger domestic demand.
The 2011 estimate for U.S. GDP was revised up 0.7 points to 3.0%,
while the forecast for the Euro Area as a whole was unchanged at 1.5%.
Germany’s 2011 GDP forecast was revised up 0.2 points to 2.2%. The
growth projection for this year in Japan was revised upwards by 0.1
points to 1.6% while the 2011 outlook for the United Kingdom is
unchanged at 2.0%.
Canada saw its 2011 GDP forecast revised down 0.4 points to 2.3%
after seeing 2.9% growth in 2010.
In both 2011 and 2012, the IMF expects growth in emerging and
developing economies to remain buoyant at 6.5%, a modest slowdown from
the 7% growth registered last year and largely unchanged from the
October WEO.
The unchanged outlook is typified by the projections for Asian
giants China and India, whose economies are forecast to grow by an
unrevised 9.6% and 8.4% respectively in 2011.
The WEO update cautioned that the baseline projections above
“assume that current policy actions manage to keep the financial turmoil
and its real effects contained in the periphery of the euro area,
resulting in only a modest drag on the global recovery.”
“This view reflects the limited financial spillovers observed so
far across financial markets and regions,” it added, “as well as the
fact that policy responses following the Greek crisis helped limit its
impact on the global recovery in the second half of 2010.”
There is also the assumption that policymakers in emerging markets
respond in a timely manner to keep overheating pressures in check.
The WEO noted that downside risks to the outlook “remain elevated”
and arise from the possibility of problems in the euro area periphery
spreading to the core of Europe; the lack of progress in crafting
medium-term fiscal consolidation plans in major advanced economies; the
continued weakness of the U.S. real estate market; high commodity
prices; and overheating and the potential for boom-bust cycles in
emerging markets.
On the upside, the IMF sees risks from stronger-than-expected
business investment rebounds in major advanced economies.
The report warned that financial stresses are expected to remain
elevated in EU periphery “where market participants are still concerned
about sovereign and banking risk, the political feasibility of current
and envisioned austerity measures, and the lack of a comprehensive
solution.”
As a result, it expects European sovereign peripheral spreads and
bank funding costs to remain elevated during the first half of this
year, adding that financial turbulence “could re-intensify.”
The IMF said the risk of financial turmoil spreading from the
periphery to the core of Europe “is a by-product of continuing weakness
among financial institutions in many of the region’s advanced economies,
and a lack of transparency about their exposures.”
The WEO argued that the vulnerability of sovereigns underlines the
urgency of moving toward more sustainable fiscal pathsnot just by
countries in the euro area periphery, but also by major advanced
economies.
At the same time, it added, “monetary accommodation needs to
continue in the advanced economies. As long as inflation expectations
remain anchored and unemployment stays high, this is the right policy
from a domestic perspective.”
The IMF also wants to see continued progress to repair and reform
financial systems. The report described this as a critical element in
the return of credit conditions to normal and would help reduce the
burden on monetary and fiscal policy to support the recovery.
As for emerging economies, rising inflation will be an issue for
some, the IMF predicted, noting that the recent round of high food price
inflation “has been quite persistent,” beginning to feed into overall
price inflation in a number of economies.
Consumer prices in these economies are projected to rise 6% this
year, an upward revision of 0.75 percentage point relative to the
October 2010 WEO. Signs of overheating are also being seen in some
countries via rapid credit growth or rising asset prices, the report
said.
Stubbornly high commodity prices are also expected to influence the
inflation outlook in 2011, with the IMF projecting upward pressure on
prices to continue “due to continued robust demand and a sluggish supply
response to tightening market conditions.”
As a result, the IMF’s baseline petroleum price projection for 2011
is now $90 per barrel, up from $79 per barrel in the previous WEO.
Non-oil commodity prices are expected to rise 11% this year, with the
near-term risks for most classes to the upside.
So unlike its advice to advanced economies, the IMF called for
monetary tightening to begin or continue in emerging economies where
overheating pressures are starting to emerge.
It warned that if policymakers fall behind the curve in responding
to nascent overheating pressures and asset price bubbles, “macroeconomic
policies in key emerging economies could be setting the stage for
boom-bust dynamics in real estate and credit markets and, eventually, a
hard landing in these economies.”
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** Market News International Washington Bureau: 202-371-2121 **
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