Sometimes reading forecasts from great and virtuous groups such as the International Monetary Fund has to be done with a deal of scepticism — mostly because they are imprecise like all forecasts, but masquerade as something almost Swiss clock-like. Every forecast change, as we received overnight, means the previous prognostication was wrong. But in this case, the start of year update to the IMF’s World Economic Outlook of a cut of 0.1% to its forecasts for this year and next hardly justified the attention it received, especially the concentration on the cuts.
While “small trim” would be a better description, the reporting in some outlets, such as the Financial Times or CNBC, had a gloomy tone to it. But when you looked at what the IMF actually reported on its website, you find the fund is actually a bit more positive than those reports suggest. The IMF sees more on the upside than the downside, which is something of a change from its commentaries in the past couple of years.
“Global growth will strengthen gradually in 2013,” said the IMF, as the constraints on economic activity start to ease this year. But the recovery is slow, and the report stressed that policies must address downside risks to bolster growth.
In fact the trimming of the October forecast was down to the eurozone contracting by 0.2% this year instead of growing by 0.2% as forecast back in October. That hardly justifies the tone of some of the stories. It’s a tiny tidying up, the smallest bit of forecasting housekeeping you can have.
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But some reports allowed that to obscure the more optimistic tone to the fund’s comments, that it sees global growth edging higher this year, and perhaps doing a bit more than it believes. So stand by for an upgrade in the forecast in the big set piece World Economic Outlook to be issued in April if we don’t get any problems between now and then (the US and Italy for instance?).
To add to its more optimistic tone, the fund said that “crisis risks are abating, although downside risks remain significant” and “emerging markets, developing countries, United States, will be the main sources of growth”.
“Policy actions have lowered acute crisis risks in the euro area and the United States,” the report noted. “Japan’s stimulus plans will help boost growth in the near term, pulling the country out of a short-lived recession. Effective policies have also helped support a modest growth pickup in some emerging market and developing economies. And recovery in the United States remains broadly on track.”
Global growth of 3.5% (up from 3.2% in 2012) is still pretty solid given the problematic state of the eurozone and the rising possibility that Britain could be the destabilising factor in the next couple of years and not Italy (but wait until the results of next month’s poll), France or Greece (again). Prime Minister David Cameron’s long awaited speech overnight on his country’s future with the EU means the UK will now increasingly be seen as the unhappy man of Europe and the most likely to leave, with all the problems that will cause.
Still the outlook for the world economy seems stronger than at any time in the past three years, judging by comments from the great and good in talkfest headquarters at Davos in Switzerland this week. And even on the eurozone, the IMF’s outlooks is more optimistic than it has been in over two years. Yes, it sees the euro area being the main drag on global growth, with those continuing concerns. But it also sees growth there edging higher towards the end of the year and growing by 1% in 2014. That Italy will contract by 1% is the standout forecast and confirms it is now the sickest of the world’s major economies.
The fund sees emerging markets growing by a solid 5.5% this year, and 5.9% in 2014, with China leading the way with growth rising to 8.2% in 2013 and 8.5% in 2014. Developed economies are forecast to stagger along at an annual 1.4% this year, jumping to 2.2% next year. That’s good news for Australia.