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IMF Sees Modest, Uneven Growth In Global Economy

IMF Sees Modest, Uneven Growth In Global Economy

By Don Lee, Tribune Washington Bureau (TNS)

Global economic growth is likely to remain modest and highly uneven, and the longer-term prospects are even more sobering, according to the International Monetary Fund.

The IMF, in its latest outlook released Tuesday ahead of its spring meeting in Washington later this week, sees the U.S. economy expanding at a robust 3.1 percent this year, up from 2.4 percent last year.

That’s less optimistic than the IMF’s forecast in January, which predicted U.S. growth at 3.6 percent this year; the downgrade reflects the weak first quarter and strong dollar that is weighing on American exports.

The U.S. is still expected to be the main locomotive for the world economy, which is projected to grow 3.5 percent this year, up just a notch from 3.4 percent in each of the last two years. By global standards, these are moderate rates and well below pre-recession levels.

During the 2008 financial crisis and in its immediate aftermath, it was the sluggish performance of advanced economies like the U.S. that weighed on the world, while developing countries led by China pushed ahead. The tables have since turned.

Economic output in rich countries is expected to accelerate to 2.4 percent this year and next, up from 1.8 percent this year. By comparison, the IMF said growth in the developing world will weaken to 4.3 percent this year from 4.6 percent last year and 5 percent in 2013.

One big factor in the divergent trends is energy and other commodities. The steep fall in prices of oil and metals such as copper is generally a plus for the U.S. and Europe, but are taking a toll on big exporting nations such as Russia, Brazil, and Nigeria.

Meanwhile, growth in China, the world’s largest developing nation, is likely to keep sliding as authorities move to tamp down excessive investments in real estate. The IMF reckons China will expand 6.8 percent this year, down from 7.4 percent last year, and then slide further to 6.3 percent next year.

The IMF’s projections for the U.S. are more bullish than other forecasts, including that of the Federal Reserve. Besides the strong dollar, risks to the American economy include geopolitical instability and the uncertainty of monetary policy as the Fed prepares to hike interest rates for the first time in nearly a decade.

Longer term, the IMF’s latest World Economic Outlook paints a picture of lowered expectations.

The lender of last resort warned that the world’s potential growth, or the maximum speed of economic activity before inflation heats up, will be lower than in the past. That’s partly because of the lingering effects from the financial crisis, but has more to do with longer-term trends such as slowing productivity and population growth.

“More subdued growth prospects lead, in turn, to lower spending and lower growth today,” Olivier Blanchard, the IMF’s chief economist, said Tuesday.

The IMF’s managing director, Christine Lagarde, said this “new mediocre” threat could be the “new reality” for the global economy, unless nations act with structural reforms and policies that boost infrastructure spending.

But, Lagarde said in a speech last week, “frankly, in too many countries, these reforms have been lagging.”

(c)2015 Tribune Co., Distributed by Tribune Content Agency, LLC

Photo: Sebastian Alvarez via Flickr

Overseas Problems Won’t Derail Growing U.S. Economy, Analysts Say

Overseas Problems Won’t Derail Growing U.S. Economy, Analysts Say

By Dean Starkman, Los Angeles Times (TNS)

NEW YORK — Call it the Great Divide: The new year figures to be one of robust economic growth in the U.S., with slowdowns, stagnation and setbacks everywhere else in the world.

The list of global problems is indeed long and worrisome. Europe and Japan teeter on the edge of recession. Russia careens toward a full-blown economic crisis. China’s once-torrid growth is slowing faster than previously forecast. And many emerging economies are getting slammed by plunging oil prices.

All the overseas problems put together, though, are not enough to derail a strong U.S. economy, Wall Street analysts say. The Commerce Department stunned markets Dec. 23 by reporting that the nation’s total economic output grew at an annual pace of 5 percent in the third quarter. The result blew past an already strong estimate of 3.9 percent.

“Spirits unleashed,” was how Mark Zandi of research firm Moody’s Analytics Inc. described the U.S. economy even before the final estimate for the third quarter came in.

The good U.S. economic news, forecasters said, will translate into solid but not spectacular returns in the stock market, which has been on a long bull run.

The Standard & Poor’s 500 index was up about 11.4 percent for 2014, its third straight year of gains since the Great Recession. Most forecasts call for returns to be about half that in 2015 and beyond.

Forecasts can always be wrong, of course, but the new year begins with a set of unusually well-defined themes that, unless something dramatic happens, figure to play an important role in shaping the year’s global economic picture. Here are a few of them:

A Strengthening U.S. Economy

Although the third-quarter Commerce Department report was a pleasant surprise, most forecasts call for gross domestic product — the value of all goods and services produced in the country — to be lower but still healthy near or above 3 percent. That’s a rate not achieved for a full year since the Great Recession.

The economy remains a long way from full employment, Zandi said, but job growth now averaging around 225,000 a month should be enough for the next 18 months to absorb the number of under-employed and unemployed, which together account for about 1.25 percent of the labor market.

Even before mid-2016, wage growth, long a missing ingredient from the U.S. recovery, should take hold and reach 3.5 percent before inflation over the next two years, around 2 percent after inflation.

Improved moods among consumers could mean more purchases of cars and other big-ticket items that already are back to pre-recession levels.

Morgan Stanley expects the still-struggling housing sector to bounce back with 10.2 percent growth in residential investment. The 1.8 percent growth for the just-completed year was hampered by a difficult winter, an uptick in mortgage rates and tight lending standards that only now are starting to ease.

Moody’s also noted that nearly 3 million millennials — those 18 to 34 years old — moved in with their parents since the start of the recession seven years ago, and they represent pent-up demand for housing.

Analysts expect that only the energy sector, hurt by a plunge in oil prices, will lag behind.

Overseas Struggles

U.S. economic strength is offset by weakness in Europe, where policymakers are contemplating further stimulus to ward off the risk of deflation — a debilitating condition of falling prices and wages.

Morgan Stanley, Goldman Sachs Group Inc. and other banks forecast growth for the Eurozone to be less than 1 percent, only slightly above what Citigroup Inc. describes as the region’s “shabby recovery” of a meager 0.68 percent on average since the financial crisis.

Bank of America Corp.’s Merrill Lynch unit calls the risk of European deflation a “clear and present danger.” The German economy, the region’s largest, slowed to about 1.5 percent growth last year and Citigroup and others expected it to slow further, to about 1.1 percent in 2015.

A relative bright spot is Spain, where fiscal stimulus, rising business confidence and an improving labor market are expected to contribute to growth of a still-modest 1.6 percent.

Russia, the Eurozone’s third-largest trading partner, is near recession as it struggles with cheap oil and international sanctions over its actions in Ukraine. Its currency fell more than 60 percent against the dollar last year.

Japan, which tipped into recession in the third quarter, will continue to struggle with 1 percent growth, according to most forecasts. China, once a growth engine, now is considered a worry, as its economy slows to 7 percent or below amid questions about the health of its property markets and financial system. Moody’s said China’s growth is likely to be the slowest since 1990.

The picture is mixed for Central and South America. Citigroup is forecasting 4 percent growth for Mexico but much weaker performances — less than 2 percent — for the region’s other big economies: Brazil, Argentina and Venezuela.

Analysts consider the U.S. economy to be insulated, for now, from the world’s travails mainly because exports account for only about 13 percent of its total economic output and foreign sales for only 10 percent of total sales by the 500 major companies in the S&P 500 index.

Cheap Oil

A stronger U.S. recovery already was on track when oil prices began their more than 40 percent drop six months ago to levels not seen since the Great Recession. Prices started to stabilize as the holidays approached around $55 a barrel for West Texas Intermediate crude.

The result will be a windfall for global consumers in oil-importing countries. Moody’s Chris Lafakis estimated that every $10 decline in oil prices corresponds to about a 0.2 percent gain in real U.S. economic growth.

If oil stays at current levels, he said, the net effect will be to channel $120 billion from the oil sector — or about 13 percent of corporate profits — to the rest of the U.S. economy.

Oil is expected to drift higher but remain relatively cheap throughout the year, more likely in the range of $80 a barrel, according to several forecasts.

Oil exporters such as Venezuela, Iran and Russia will continue to suffer, but Citigroup estimated that the total global redistribution of income from oil producers to consumers will be about $850 billion, or nearly 1.1 percent of global GDP.

For Europe and Japan, cheap oil could provide a significant boost to their central banks’ efforts to pump up growth.

Analysts, in general, summed up their forecasts with a warning that even with a world-beating U.S economy, investors should enter 2015 with tempered expectations.

The bull market will probably continue, said Candace Browning, Merrill Lynch’s head of global research, but “the sentiment is far from euphoric.”

Photo: Sebastian Alvarez via Flickr

IMF’s Lagarde: ‘Bold Action Needed’ For Global Economy

IMF’s Lagarde: ‘Bold Action Needed’ For Global Economy

Washington (AFP) – The global economy has picked up but bold action is needed to surmount serious dangers and deliver the benefits more evenly, International Monetary Fund managing Director Christine Lagarde said Thursday.

Lagarde said the Ukraine crisis, slower growth in emerging economies, the threat of deflation in the eurozone, financial sector vulnerabilities in the two leading economies and market turbulence generally are serious hurdles to extending the global recovery.

Spelling out the policy challenges for the world’s economic policy-makers at the start of the annual IMF and World Bank spring meetings, Lagarde said determined efforts were needed to strengthen growth, after a “subdued” rebound from the economic crisis.

“The global economy is turning the corner, but the recovery is still too weak and too slow….Bold actions are needed,” she said.

“For some, despite the fact that growth is strengthening, they’re not feeling it. We still have 200 million people unemployed.”

The IMF laid out a detailed policy agenda for its meetings with finance ministers and central bank chiefs from around the world, which highlights the need for vigilance in countries at all points on the economic cycle.

Advanced economies need to be sure not to mishandle the shift from easy-money regimes set during the financial crisis, and the Fund warns that tightening too fast could derail their recovery and hurt growth in other countries.

China needs to deftly handle its non-banking credit bubble, and the United States needs to address new risks in corporate debt, margin lending and leveraged finance, the IMF warns.

Japan needs to push through on the “third arrow” of its turnaround — structural reforms — while emerging markets must themselves redo policies to adjust to a world of tighter capital.

Lagarde reiterated the IMF’s advice to the European Central Bank. urging it to quickly embark on operations to fend off deflation which could reverse Europe’s recovery.

While saying the fund respects the ECB’s judgement, she urged it to act “sooner rather than later”.

Both the IMF and the World Bank stressed that the Ukraine crisis could also damage the world’s economic prospects, as both bodies marshall billions of dollars to prop up Kiev’s finances after the ouster or pro-Moscow president Viktor Yanukovich in February.

In the wake of its annexation of Ukraine’s Crimea region last month, Russia stepped up the tensions Thursday with President Vladimir Putin threatening to cut off its supply of natural gas to Ukraine.

Finance ministers of the G7 industrial powers will hold discussions mainly on Ukraine Thursday on the sidelines of the IMF and World Bank meetings, according to diplomats.

Their view is likely to be put to a meetings late Thursday and Friday in Washington of the G20 economic chiefs.

World Bank President Jim Yong Kim warned that the crisis will have far-reaching effects on Russia, which could be forced into recession.

“This is a very serious issue for Russia — a very serious issue for its growth prospects,” Kim told reporters. “So we simply urge all of the parties to continue with negotiations and find a peaceful means of moving forward.”

The IMF has forecast global growth at 3.6 percent this year, and 3.9 percent next year. But Lagarde noted that the G20 itself in February observed that with the right policies and the right cooperation between countries, growth could be higher by two percentage points over the next half-decade.

“That is the kind of growth trajectory that would help create jobs,” she said.

In response, Nicolas Mombrial, of the anti-poverty group Oxfam, said the IMF needs a plan that would address another part of the picture, inequality.

“There’s no trade-off between growth and inequality. There will be no inclusive growth if economic inequality remains out of control.”

AFP Photo/Karen Bleier

Euro Crisis Worsens, With Huge Risks For U.S.

The situation in Europe is looking increasingly dire, posing a grave risk to the global economy.

In the past day alone, the Greek government shut down because civil servants are protesting austerity measures, Moody’s has downgraded Italy’s debt, and France and Belgium had to act to save European lender Dexia. Even those without a good grasp of the intricacies of the European Union and its financial institutions — a category that admittedly includes most people both within and outside Europe — realize that the euro crisis bears a disastrous potential for economies throughout the world.

The impact of the worsening situation in Europe is already being felt in the stock market, but it could have more lasting effect on U.S. economic recovery. Ezra Klein writes in The Washington Post:

[Recent events in Europe] point to two things that could happen over the next year that would crack the American recovery and reshape the 2012 election: Some European countries could default on their debt and the European debt crisis could undermine the continent’s financial system and lock credit, much as happened here after the fall of Lehman.

On Monday night, Goldman Sachs sent out a research note that sounded less like an analysis and more like a warning. Their European arm, they said, “now expect the Euro area to fall into recession beginning in the fourth quarter, with full-year 2012 growth at only 0.1%.” Ouch. But they tried to be as clear as possible: this is our problem, too. “The European crisis threatens US economic growth via tighter financial conditions, reduced credit availability, and weaker growth of US exports to the region. This impact is likely to slow the US economy to the edge of recession by early 2012,” they continued.

The fact that it’s our problem doesn’t mean we have much say in the solution. Talk to government officials and they’ll tell you that the United States has three points of leverage over the Europeans: 1) They care what we think. 2) They need the International Monetary Fund’s assistance, and we have a major voice in that organization. 3) They want the Federal Reserve to continue providing liquidity and support to the global financial system in ways that work with their rescue plans. Put together, that’s more than enough to make us heard. It’s not nearly enough to make us decisive.

The IMF is trying to re-work its strategy to prevent a total EU collapse, but the crisis continues to worsen and cause market turbulence. The United States might not be able to directly intervene and prevent a disaster in the EU; it can, however, create a plan to help Americans if our economy is significantly damaged by the situation. Meanwhile, GOP presidential hopefuls in the United States seem to be avoiding the European issue entirely. Given the severity of the associated risks, the euro crisis warrants closer attention from the American public — and especially from American politicians.