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Analyzing what the IMF says about the world economy

0 2759 Market Intelligence

Perhaps the most closely watched numbers on the world economy are issued by the Washington-based International Monetary Fund (IMF).

Perhaps the most closely watched numbers on the world economy are issued by the Washington-based International Monetary Fund (IMF).

The IMF isn’t some head-in-the-clouds body. It doesn’t sit idly on the sidelines while issuing lofty decrees.

It’s down in the trenches with many of the countries that it is trying to help.

The IMF is one of the lenders of last resort to nations that have gone off the rails.

It needs accurate numbers to back up whatever action it decides to take.

The IMF lends money to countries in distress. It also set conditions on those funds, requiring borrowers to straighten up and adopt measures that will pay off in the long run.

Those strictures are often stringent and not popular with the citizens of the country or countries being bailed out.

For example, the IMF is a member of the so-called “troika” trying to resolve the debt crisis in Europe. The European Central Bank (ECB) and the European Commission (EC) are the other two.

All of this is simply to say that the IMF has some idea what it’s talking about.

That’s why its conclusions are taken so seriously.

In its latest World Economic Outlook (WEO) report, issued January 24, the IMF has scaled back its expectation of world growth this year and next by 0.7 and 0.6 percentage points respectively.

After world gross domestic product (GDP) increases of 5.2% in 2010 and 3.8% in 2011, the figures are expected to be +3.3% in 2012 and +3.9% in 2013.

The emerging and developing economies will continue to lead the way, with GDP gains of 5.4% in 2012 and 5.9% in 2013. In 2010 and 2011, they were +7.3% and +6.2%.

The advanced economies will slow to +1.2% in 2012 and +1.9% in 2013, after achieving +3.2% in 2010 and +1.6% in 2011.

Europe is ground zero when it comes to identifying the source of the world’s economic problems.

High sovereign debt in many European nations has forced up borrowing costs and dictated strict government austerity measures.

At the same time, financial sector reforms and worries about public sector bond defaults are causing deleveraging in the banking sector.

That’s a fancy word to describe less lending and more accumulation of capital.

Such actions are not conducive to consumer spending and foreign trade, the usual drivers of the economy.

While I realize this report risks becoming a wall of numbers, there are still more figures on a regional level that should be set out.

For example, GDP in the Euro area is now projected to decline 0.5% this year, a large mark-down of 1.6 percentage points versus the IMF’s last forecast made in September 2011.

In other words, the Euro-zone will likely fall back into recession at some point this year. 2012 growth in Germany and France will hover around 0.0%, while Spain and Italy will decline by nearly 2.0%.

Spain is currently experiencing its highest unemployment rate in fifteen years. The overall jobless level was 22.9% in Q4 11. Nearly one in two workers under the age of 25 is out of work.

The Euro area is expected to recover slightly in 2013, with a +0.8% GDP performance.

The emerging world will be held back by the weaker external environment – i.e., fewer export sales to Europe – plus some home-grown problems. The latter include China’s property price bubble that has dictated monetary efforts to reduce inflation.

On the heels of a +10.4% GDP pace in 2010 and +9.2% in 2011, China’s growth is expected to moderate to +8.2% in 2012 and +8.8% in 2013.

India’s GDP will rise 7.0% this year and 7.3% next year. Those figures aren’t much different from 2011’s 7.4%, but they do fall well short of 2010’s 9.9%.

The numbers for China and India are still pretty good. Compare them with Japan’s.

The land of the rising sun had a terrible 2011. Earthquake, tsunami and nuclear meltdown were visited upon its shores. Chain-of-supply disruptions set real GDP back by nearly 1.0%.

A rebound will see Japan grow at a rate very similar to what is expected in the U.S. and Canada over the next two years. The IMF is forecasting all three nations will advance by between 1.5% and 2.0% this year.

Next year, the U.S. (+2.2%) will do a little better than both Canada (+2.0%) and Japan (+1.6%).

Finishing with Latin America, Mexico is expected to move ahead +3.5% in both 2010 and 2011. Brazil will first trail Mexico in 2012 (+3.0%), then exceed it in 2013 (+4.0%).

It’s also interesting to note the IMF’s views on commodity markets. The average price of oil world-wide in 2010 increased 28%. It rose another 32% in 2011.

According to the IMF, one positive effect of the world economic slowdown will be to take the pressure off. In 2012, oil prices are expected to drop 5% on a year-over-year basis.

In 2013, they will ease a further 4%. This assumes no great upset in world markets caused by political unrest or outright conflict.

Non-fuel commodity prices, which rose 26% in 2010 and 18% in 2011, are forecast to pull back 14% in 2012 and stay essentially flat (-2%) in 2013.

This has implications for the strength of investment in Canada’s resource sector. High and rising commodity prices provide the incentive for owners to initiate mega raw material projects.

In the absence of such demand and price buoyancy, some projects will be thrown into doubt.

by Alex Carrick

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