Stifled Optimism is the language of the IMF in its latest report World Economic Outlook 2011.
At the very onset, the Fund sheds away fears of a double-dip recession in advanced economies on the heels of accommodative policies, improvement in confidence and strengthening of consumption.
But soon, thereafter, the Fund also remarks that the pace of growth and output is not strong enough to ward of the high unemployment rates witnessed by many in the developed world.
Additionally, commodity prices, in particular oil, have also created a new genre of challenges for global economic recovery, driven largely by structural changes in the consumption of commodities by developing and emerging economies.
Even though the Fund is optimistic about the resumption of commodity supplies in response to rising prices, anticipation of better weather conditions and better harvests in sub-Saharan Africa - supply risks remain volatile. This is particularly because of sluggish supply responses and gradual rather than radical build-up in food inventories, which might keep the pressure on food and oil prices.
The fund also points towards a two-pronged growth in the world today. While advanced economies are slowly recovering thanks to a rebound in industrial production, the output of emerging economies has already recovered to pre-crisis levels.
Interestingly, inflation pressures are rising much more in emerging and developing economies, where food and energy prices have a higher weight in the CPI, relative to advanced economies where core inflation (excluding food and energy prices) is the key indicator.
Consequently, financial markets do not foresee large-scale tightening in advanced economies in the year to come.
On the fiscal side, no substantial fiscal consolidation is likely to be on the cards in 2011 in advanced economies. In the US, despite recent reductions in the governments discretionary spending, the IMF projects a widening of the structural deficit by 0.6 percent of GDP. In the Euro area, on the contrary, the structural deficit is projected to fall by about 1 percent of GDP.
On the other hand, emerging economies are believed to face pressures from overheating in the medium-term, despite a favourable short-term outlook. In these economies, macroeconomic tightening is believed to be insufficient, especially considering the high inflation rates, which render real interest rates a tad low.
Yet, both categories of economies are tightly linked: Easy monetary policies in the developing world affect emerging economies, while policies, such as exchange rate policies and capital controls, by emerging economies have an impact on advanced economies.
To tackle these concerns, the Fund warns advanced economies of the need to enforce significant fiscal adjustments. "The required adjustments amount to more than 10 percent of GDP for Japan and the United States; 5 to 10 percent of GDP for France, Spain, and the United Kingdom; and 3 to 4 percent of GDP for Canada, Germany, and Italy," the IMF highlighted.
For emerging economies, the IMF suggests further monetary and fiscal tightening to combat the risks of economic overheating, which are likely to bloat with increases in food and energy prices.
Overall, while the IMF brings some relief by announcing a move towards global economic recovery, it does so with a flavour of caution. No one-size-fits-all solution has been suggested, except that policymakers in respective economies need to actively pursue appropriate steps to bring back stability in their respective economies.
==================================================================
Web Tabs --- World - Global economy
==================================================================
IMFs good news with strings attached
==================================================================
Share in Share in
aggregate aggregate
GDP of GDP of
group (%) world (%)
==================================================================
Advanced economies 100 52.3
United States 37.7 19.7
Euro area 27.8 14.6
Japan 11.1 5.8
UK 5.6 2.9
Canada 3.4 1.8
Emerging and developing economies 100 47.7
Central and Eastern Europe 7.2 3.4
Commonwelath of independent states 8.9 4.2
Developing Asia 50.4 24
Latin American & the Caribbean 18 8.6
Middle East and North Africa 10.4 5
Sub-Saharn Africa 5.1 2.4
==================================================================
The numbers pertain to 2010 Source: IMF WEO April 2011
Comments
Comments are closed for this article.