The IMF's World Economic Outlook

On Wednesday, in its new World Economic Outlook [WEO], the International Monetary Fund [IMF] announced that global economic growth is slowing.

The WEO advised that:

The global expansion is losing speed in the face of a major financial crisis.

The report says that, thanks to the correction in the housing market, the leading offender is the U.S.

The emerging and developing economies have so far been less affected by financial market turbulence and have continued to grow at a rapid pace, led by China and India, although activity is beginning to moderate in some countries.

How bad will it get? Judging by the IMF's estimates, the outlook is more about a slowdown rather than an outright contraction. According to the IMF, last year, global GDP rose by 4.9%. The projection for 2008 is 3.7% growth, followed by 3.8% in 2009.

If the prediction proves accurate, the deceleration will still bring pain to various segments of the world economy. Then again, world GDP rising by 3.7% is hardly a disaster. Indeed, 3.7% growth is the upper range that's prevailed since 1970, as the chart below shows.

Source: IMF's World Economic Outlook (April 2008)

But no one should ignore the other risks bubbling that aren't obvious in estimates for GDP. Inflation remains a threat, for example, particularly in the developing world (see chart below). The trend threatens the ability of the developing world to export disinflation to the U.S. and the developed world generally, as has been the case in past years. At some point, if prices keep rising, might the emerging markets export inflation? In fact, that seems to be the case now for certain items, starting with oil, which on Wednesday touched another new record high of $112 a barrel in New York. The U.S. is the world's biggest consumer of oil, and more than half of its crude is imported, much of it from the developing world.

Source: IMF's World Economic Outlook (April 2008)

Meanwhile, monetary policy threatens to fan inflation's fire. According to the IMF, real short-term interest rates have turned negative in the U.S., Europe and Japan, as the third chart below shows.

Source: IMF's World Economic Outlook (April 2008)

Of course, the argument for such a loose monetary policy is that the global economy needs an antidote to the deleveraging that's sweeping financial systems from New York to London to Tokyo. The IMF report warns that:

A further broad erosion of financial capital in a climate of uncertainty and caution could cause the present credit squeeze to mutate into a full-blown credit crunch, an event in which the supply of financing is severely constrained across the system.

In fact, one could argue that a fair degree of the global economy's future path over the next year or so is tied to whether or not the credit crunch mutates into something worse from this point onward. The challenge for policy makers is that addressing each scenario requires different medicine. If greater liquidity troubles are coming, central banks may feel compelled to act by effectively printing more money than is otherwise prudent. The danger is that the liquidity injections turn out to be unnecessary, in which case inflationary pressures will be that much more troublesome and difficult to control. If, and when that becomes the leading issue for central banks, the easy money party will end, perhaps for an extended period.

The IMF report leans toward the conclusion that the credit crunch may yet get worse before it gets better. Unfortunately, no one really knows and so the risk of dispensing the wrong policy medicine remains higher than usual at the moment. Risk, in short, is still with us even if the world economy is set for modest growth.

Comments

[Krakatoa]

How come IMF doesn't give higher rates, & fiscal discipline recipe to US like what they impose to emerging market crisis for the same problem??

[MattBlackman]

Interesting but what does it really tell us. Most economic forecasts a year ago said global GDP would continue to increase through 2010.

Here is a quote that says it all about these kinds of "insights".....

In 1929, days after the stock market crash, the Harvard Economic Society reassured its subscribers: “A severe depression is outside the range of probability” In a survey in March 2001, 95% of American economists said there would not be a recession, even though one had already started. Today, most economists do not forecast a recession in America, but the profession's pitiful forecasting record offers little comfort. – Economist November 15.

So now IMF economists are saying the slowdown will be minimal? If history is any guide, the folks who write these reports have about a 95% chance of being wrong. Cold comfort isn't it?

[iThinkBig]

I will have my backup plans to have more the government cheese and wheat pasta completed before 2009.

[Blythe]

The IMF report considers the tale of two cities showing how emerging markets will behave differently than the U.S. I think there is great credence in this report.

[Prof.THANGIAH]

The American economy will only short time crisis and by its equilritati ngmechanism will bring the economy toequilibrium level very soon since the technoly. the capital resources and skilled manpower all over the ready to move around the job market and the political to harner the resources is well within the reach of the humanity, the world is place to live with economic prosperity

[Prof.THANGIAH]

The American economy will only short time crisis and by its equilritati ngmechanism will bring the economy toequilibrium level very soon since the technoly. the capital resources and skilled manpower all over the ready to move around the job market and the political to harner the resources is well within the reach of the humanity, the world is place to live with economic prosperity

[Prof.THANGIAH]

The American economy will only short time crisis and by its equilritati ngmechanism will bring the economy toequilibrium level very soon since the technoly. the capital resources and skilled manpower all over the ready to move around the job market and the political to harner the resources is well within the reach of the humanity, the world is place to live with economic prosperity