It was a gloomy, and some would argue more realistic World Economic Outlook from the International Monetary Fund when it offered the following grim warning overnight: “The world economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s.”
But there are hints and figures throughout the gloomy report that provide little rays of sunshine for Australia. We are not the basketcase some here would have us believe (such as that hindsight economist, Joe Hockey), despite economic conditions worsening globally and the 1% rate cut by the Reserve Bank this week.
The strongest growth this year and next will be in the Asian region, the area we have become “coupled” to. In fact the IMF’s much reduced 3% growth estimate for the world next year depends exclusively on growth in Asia, led by China and India.
It’s a familiar story. And while investors sell the Australian dollar and shares because of our exposure to global growth and commodities, those disappearing over the horizon (and those quietly cheering their departure here) should read the IMF’s report because they will find this tantalising prediction about the outlook for 2009.
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The Fund indentified three factors that would lay the groundwork for the gradual recovery next year: the stabilisation of commodity prices, although at 20-year highs (my bolding); a bottoming out of home price declines in the worst US housing slump in decades; and the resilience of emerging economies benefiting from strong productivity growth and improved policy frameworks.
So it was against this that the Fund cut its July forecasts for global economic growth to 3.9% for this year and 3.0% for 2009, the slowest pace since 2002. The revisions shaved off 0.2% and 0.9%, respectively.
“The major advanced economies are already in or close to recession, and, although a recovery is projected to take hold progressively in 2009, the pickup is likely to be unusually gradual, held back by continued financial market deleveraging,” the report said, hours after the US Federal Reserve and five other central banks coordinated cuts in interest rates to boost economic growth and jump-start credit flows.
The IMF said that emerging and developing economies were also slowing and “The immediate policy challenge is to stabilize financial conditions, while nursing economies through a period of slow activity and keeping inflation under control.
It warned that the growth projections for 2009 came “against an exceptionally uncertain background … and the outlook is subject to considerable downside risks, with the US, Europe, the UK and Japan close to or sinking into recession.”
But against that big qualification, it’s not all bad: Australia will still grow by 2.5% this year and 2.2% next year. China will grow by 9.7% this year and 9.3% next, and growth in many other parts of Asia, outside of Japan, will still be modest, albeit down from the levels of this year.
But compared to the sort of 2009 that confronts Europe, the US, UK, and especially countries like Ireland and Italy and America, Asian growth outside of Japan will be positively booming by comparison.
Even Japan will perform better than much of the developed world. the IMF estimates that the Japanese economy will grow at 0.7% this year (off a substantial 0.8% and 0.5 percent in 2009, down a full 1%.
The United States by contrast will grow at 1.6% this year (thanks to the strong second quarter growth of 2.8% for GDP) and a bare 0.1% next year.
Two eurozone economies were set to contract: Italy, both this year and next, and Spain, in 2009, while the UK will contract by 0.1% next year after growth of just 0.1% this year (and its already in the can).
But it’s not all roses for Asia as the IMF says the risks are firmly “on the downside.” But here’s are the Fund’s comments on what it called “Emerging Asia”, which excludes Australia, South Korea, Japan, Taiwan, New Zealand and Singapore.
Growth in the region is projected to moderate to 7¾ percent in 2008 and 7 percent in 2009 from 9¼ percent in 2007. Weakening external demand is likely to weigh on exports, but, in some cases, the impact may be mitigated by still-loose macroeconomic policies and currency depreciation. Investment will also moderate, mainly because of deteriorating export prospects.
Consumption will ease because of still-high fuel and food prices, although subsidies, which are common in the region, may cushion the impact on purchasing power. The risks to the outlook are firmly to the downside.
The main concern is that a buildup of stress in the global financial system and a sharper-than anticipated global slowdown could further weigh on activity. On the upside, domestic demand may prove more resilient, with falling commodity prices providing a boost to real incomes.
So that’s the good news for Australia, which is better than the news from the Fund’s latest report being received in the US, Japan, UK and Europe, and even in New Zealand.
But the situation is still dangerous, as the Fund said at a media briefing: “The world economy is entering a major downturn in the face of the most dangerous financial shock in mature financial markets since the 1930s.”