World Financing: Two Speed Recovery
Saturday, January 30, 2010
IMF outlooks depict emerging markets surging ahead in the coming years, while advanced economies remain bogged down.
Economies around the world are moving along the road to recovery, but this increasingly appears to be a two-speed route, according to new forecasts from the IMF. Charging down the motorway are emerging and developing markets, which the global lender thinks will grow by an average of 6% this year and 6.3% in 2011. Trundling along the access road are the advanced economies, which will manage expansion of just 2.1% this year and 2.4% in 2011.
This disparity is evident in two IMF updates -- of its World Economic Outlook (WEO) and Global Financial Stability Report (GFSR) -- that were released on January 26th. The documents also highlight dramatically different financial risks around the world. In rich countries the dangers are weak banks and spiralling sovereign debt. By contrast, in emerging markets the main peril is overly strong portfolio inflows, a comparatively nice problem to confront.
Improving Prospects
The global economy, the IMF says in its WEO update, should grow by 4% in 2010 and then by 4.3% in 2011. This is a dramatic turnaround from what it estimates was a world recession in 2009, when output fell by 0.8%. Emerging economies will drive this recovery, with advanced economies rebounding only weakly over the next two years. This is a consequence of the financial crisis that assailed rich countries over the past several years, but had much more limited impacts in most developing economies.
Financial markets are also on the mend, the global lender says in its GFSR update. Markets have enjoyed a recovery as a result of improving economic prospects and "sustained policy support". This has led to a rebound in asset prices and a reduction in risks to financial systems. However, the global lender emphasises that dangers persist from weak banking systems, uncertainty over future macroeconomic policies and imbalances in capital flows.
Low gears, bumpy road
Rich-country economies look set to remain sluggish in the next two years, according to IMF forecasts, with all of them growing at rates well below the global average. Among the major economic powers, the US will expand the most rapidly, by 2.7% this year and 2.4% in 2011 (see chart). The euro area will prove weakest, with GDP growing by just 1% this year and 1.6% in 2011. Japan should perform somewhat better, with growth of 1.7% in 2010 and 2.2% in 2011. Smaller economies such as Canada and those in newly industrialised Asia should come at the top of the growth charts.
Most advanced economies, the IMF points out, continue to grapple with debilitated banks and tight credit conditions. Specific short-term dangers include rising loan losses from exposure to commercial real estate and funding shortfalls when many bank debt issues come due for refinancing in 2011-13. It also warns about the risks of precipitous withdrawals of central bank liquidity facilities and government debt guarantees.
The IMF cautions that some advanced economies may come under threat as a result of their rising levels of sovereign debt. This problem has been most severe so far in Greece, where surging fiscal deficits have driven up outstanding national debt. Other countries appear to have partially lost confidence among investors, as reflected in rising credit default swap spreads (which measure the cost to insure against credit risk on government and other bonds).
Beyond the speed limit?
The situation is dramatically different in the large emerging economies, according to the IMF's forecasts. It reckons that China's output will swell by 10% this year and by 9.7% in 2011 (see chart). India's GDP should expand by 7.7% in 2010 and 7.8% in 2011. After a slight recession in 2009, the IMF thinks that Brazil's economy will grow by 4.7% this year and 3.7% in 2011. Even Mexico and Russia, which suffered sharp downturns in 2009, are forecast to record rapid recoveries in the next two years.
Since their banks came through the credit crunch generally unscathed, emerging markets will not struggle with broken financial sectors. In fact, the great risk is the strength of recent inflows of portfolio investment, according to the GFSR update. This surge in capital was originally driven by the return of investor risk appetites, but by the second quarter of 2009 was sustained by better growth prospects in developing countries.
Nevertheless, the IMF dismisses immediate fears of bubbles, saying that "the rise in asset prices cannot yet be considered excessive and widespread...." It points out that in most emerging markets bank credit to the private sector has yet to recover from the tumble it took in the late 2008. The one exception is China, where state banks have only recently eased off a year-long surge in corporate lending.
Labels: Economy and Business, IMF
posted @ 11:56 PM,
1 Comments:
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At February 6, 2010 at 1:37 PM,
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