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Tuesday, October 9, 2012

IMF sees 'alarmingly high' risk of fresh global slump



“Risks for recession in the advanced economies are alarmingly high,” said the Fund’s latest World Economic Outlook. “The intensity of the euro area crisis has not abated as assumed in previous projections.”

Spain’s economy is expected to contract by 1.5pc this year and 1.3pc next as austerity bites, pushing public debt to 97pc of GDP in 2013. The estimate was 84pc as recently as April, showing how quickly the debt dynamics have gone horribly wrong.

Italy will shrink by 2.3pc this year and 0.7pc next, pushing the debt ratio to an all-time high of 128pc. The report said fiscal austerity in Europewas doing more damage than “expected” .

The Fund said “weakness is spreading from the periphery to the whole of the euro area”, with even Germany buckling. The eurozone will shrink at a 0.7pc rate in the second half of this year before eking out growth of 0.2pc in 2013, but only if Europe delivers on a string of promises made over recent months.

Failure to act in time could lead to a full-blown crash, with contraction near 7pc next year in Southern Europe and a deep recession in the North. The IMF said Europe must stand behind a summit pledge in June to allow the European Stability Mechanism or bail-out fund to recapitalise crippled banks in Spain and other EMU states directly. This is deemed “critical to help break the adverse feedback loops between sovereigns and banks”. The AAA bloc of Germany, Finland, Holland, and Austria have reneged on the deal.

The Fund said the confidence boost from the European Central Bank’s bond purchase scheme (OMT) would fade unless the plan is activated “rapidly”. It warned that “rising social tensions and adjustment fatigue” in the South could reignite the crisis in any case.

Europe’s woes have combined with a credit cycle downturn in Asia and Latin America. Growth this year has been cut to 1.5pc in Brazil and 5.4pc in India, a far cry from boom rates of the BRICS heyday.

The IMF expects the US to muddle through with growth of 2.2pc this year and 2.1pc in 2013, but the US economy has been uncomfortably close to stall speed over recent months. The economy could tip into a nosedive if Congress does not reach a deal to stop automatic tax rises next year. “At the extreme, the fiscal cliff could result in a fiscal withdrawal of more than 4pc of GDP in 2013” it said.

The IMF said the US has to steer a narrow course, mapping out a “credible fiscal plan” to tame long-run entitlements without aborting the recovery altogether by tightening too hard. It expects US gross debt to reach 114pc of GDP next year, near levels accumulated during the Second World War.

China is expected to avoid a hard-landing and still has some scope to cushion any further shock with fiscal stimulus, but it cannot unleash another lending blitz akin to 2008-2009 “without creating large financial stability risks”.

In a parallel report, the World Bank trimmed its forecast for China to 7.7pc this year. It said ample liquidity over recent months had “reignited credit growth” and would power a rebound in 2013, but it also struck a note of caution. “China’s slowdown this year has been significant, and some fear it could still accelerate. Local governments’ ambitious investment plans could well face funding constraints, not least because governments are feeling the pinch of a cooling real estate market, which lowers land sales revenues.”

Gustavo Reis from Bank of America said both monetary and policy fiscal are too “tight”, while wage rises have eroded China’s competitiveness by 10pc over the last year. There is an outside risk of a “China shock” hitting the rest of the world, with implications for German exporters or iron-ore suppliers such as Brazil and Australia.

The World Bank said China may languish in the “middle-income trap” over coming decades as productivity growth slows unless it ditches its1980s growth model. The worries were echoed by Chinese think tank Strategy and Reform, which called on incoming leader Xi Jinping the grasp the nettle of reform .

“There is a potential crisis in China’s model of economic growth. The next decade might be the last opportunity for actively pursuing reform, and we should treasure this last chance. China is confronting a perilous jump, one that it can neither hide from nor avoid no matter what,” it said.

The Telegraph

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