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The
global economy remains poised for robust growth this year, following on two
years of anaemic growth. Moreover,
the prospects for next year are also positive.
According to the IMF’s April World
Economic Outlook,
the global economy is in the best two year period in over a decade.
While all regions are recovering, the upturn is most rapid in
emerging Asia, particularly China, and the United States, whereas the Euro
Area remains weak. However, the
United States economy is burdened with sizeable deficits in the current
account and public sector balances, which threaten future growth potential.
The sentiment for the Japanese economy
continues to improve. However,
some fundamental misalignments in the financial sector persist and the
country remains burdened with a deflationary setting.
As a result, the momentum of this year’s recovery is seen to wane
in the coming year. The outlook
for the major European economies, on the other hand, remains sombre.
The Euro Area will recover from last year’s sluggishness but
economic growth remains moderate. Finally, Latin America is in for a robust rebound, as all
economies are profiting from increased external demand for commodities. |
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IMF
sees period of robust growth ahead
The
increasing optimism that has been showing in the Consensus Forecast in the
past months for the global economy is also reflected in the April edition
of the World Economic Outlook (WEO) of the International Monetary Fund
(IMF).
Since the last WEO in September 2003, the IMF has raised its
forecast for global growth by about one-half percentage point to 4.6% for
this year and 4.4% for 2005, the best two year period in over a decade.
IMF
estimate for 2004 in line with market
These figures refer to global output growth, when calculating
individual countries’ weight based on purchasing power parity (PPP), as
opposed to the current US$ weights underlying the LatinFocus Consensus
Forecast.
The PPP methodology gives countries such as China and India a much
higher weight in the global aggregate.
Since both countries continue to expand at a much quicker pace than
industrialised economies, applying the PPP weights leads to higher global
growth rates than with an exchange rate weighted global average.
The IMF’s exchange rate weighted outlook for this year also
anticipates global growth at 3.8%, just 0.2 percentage points below the
latest Consensus.
For next year, the IMF anticipates global growth to slow to 3.5%
(4.4% based on PPP weights), which is precisely in line with the current
Consensus.
Rebound
seizes all economic regions but Euro Area remains weak spot
According
to the Fund, the global recovery has strengthened and broadened since
September 2003.
Industrial production has increased markedly, accompanied by a
strong rebound in global trade.
Furthermore, business and consumer confidence have increased
and investment has risen in almost all regions. In
the second half of 2003, global GDP growth averaged nearly 6% at an
annualized rate, the fastest pace since late 1999. In
part, this strong growth spurt was due to temporary factors.
In the United States, economic activity was spurred by a surge in
consumption due to the short-term impact of tax cuts and mortgage
refinancing.
In Asia, growth rebounded from the slowdown related to Severe Acute
Respiratory Syndrome (SARS).
Despite the one-off character of these factors, global GDP growth
seems to have remained solid in early 2004. While
all regions are recovering, the upturn is most rapid in emerging Asia,
particularly China, and the United States, whereas growth in the Euro Area
remains weak.
United
States growing strongly but imbalances in current account and fiscal
balance raise concerns
For the United States, the IMF has raised its growth forecast for this
year to 4.6%, 0.7 percentage points higher than in the September 2003
World Economic Outlook.
Thus, the IMF forecast is bang in line with the Consensus Forecast,
which rose a notch over last month.
For next year, the Fund is more optimistic than the panellist
average, expecting economic growth of 3.9% versus 3.6% of the Consensus.
The IMF’s forecast is based on continued strong investment
growth and only a modest slowdown in private consumption throughout 2004,
as improving employment conditions should compensate for the fading impact
of tax cuts and mortgage refinancing.
However, despite the generally positive outlook, the Fund sees a
number of uncertainties facing the recovery. These
include the pick up in employment growth from the relatively weak level
last year, which constitutes an important factor for the sustainability of
the recovery, and the potentially negative impact from the expected
interest rate hike on household wealth and consumption.
The most important threats to the U.S. economy, however, are the
exceeding deficits in the current account and the fiscal balance.
The IMF fears that the adjustment in the current account deficit
may result in a period of weaker growth, particularly if accompanied by an
abrupt and disorderly adjustment of the US$.
Fiscal
deficit likely to stay high threatening
The
WEO dedicates an entire chapter to the fiscal deficit and its impact on
the U.S. and global economy. While the Fund acknowledges that the
expansionary fiscal policy in recent years has supported the recovery,
officials nevertheless caution that the more expansionary fiscal policy
has also brought about the fastest deterioration in the U.S. budget
position in the past fifty years. The Bush administration has
pledged to lower the deficit by half from this year’s level.
However, the current budget plans are based on overly optimistic
assumptions. In addition, the United States faces the retirement of
the baby boom generation towards the end of this decade, which, in
combination with increased longevity, will exert further pressures on
public finances. A sustained fiscal deficit will cause global real
interest rates to rise to rebalance savings, which lowers global
productivity growth and income by "crowding out" private
consumption and private investment. In addition, a high fiscal
deficit puts further pressure on the U.S. current account position in the
short-term and raises U.S. debt payments to the rest of the world over
time. In the long run, this debt servicing burden erodes the value of the
US$, lowers consumption in the United States and increases it elsewhere.
Euro
Area will experience only moderate recovery
For the Euro Area, the IMF projects economic growth to increase to
1.7%, following last year’s anaemic 0.4% expansion.
This is just a notch more optimistic than the Consensus Forecast,
which sees economic growth at 1.6%, as the forecast dropped 0.1 percentage
point over last month.
For next year, the Fund expects 2.3% growth in output compared to
2.1% anticipated by the Consensus panel.
The Fund expects strong external demand, rising profitability, high
equity prices, low corporate bond spreads and solid household balance
sheets to underpin a gradual pickup in growth.
However, the robustness of the recovery is uncertain, as subdued
consumer sentiment and high unemployment may continue to weaken
consumption growth.
In addition, a further sharp appreciation of the euro could dampen
external demand.
Given the benign outlook for inflation, the IMF recommends a cut in
interest rates if the moderate pace of the recovery should slow further.
Fiscal balances on average continued to deteriorate last year and
the IMF expects fiscal deficits in France and Germany to remain above the
Stability and Growth Pact’s 3% of GDP ceiling through 2005.
Rather than implementing budget cuts to meet the target, the IMF
recommends structural measures to achieve a medium-term consolidation in
order to avoid jeopardizing the incipient recovery.
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