The IMF?s latest global forecasts present a mixed bag. Clouds of European uncertainty hang over the otherwise bright forecast for growth across the rest of the world. The world average growth of 4.5%, however, masks the large differences across the globe. Asia is pegged to lead the upturn-wagon?surprise, surprise?with growth for the region projected at 7.5% (India and China are forecast to grow at 9.5% and 10.5%, respectively) for 2010-11. This is a revised estimate of the April projection of 7%. Asia?s strong outlook is counter-balanced by the West?s relatively slower rate of growth, with the US pegged at 3% and Europe at 1%.
Asia?s economic activity has been sustained by exports and private domestic demand. In addition, private fixed investment has strengthened due to the still relatively low costs of capital and higher capacity utilisation. The overall GDP growth starting 2011 is expected to settle at a more sustainable rate of about 6.75%, once the stimulus is rolled back and stock cycle has run its course.
However, beneath the seemingly tranquil surface, the IMF sees several risks. These ?downside risks? mainly arise from anxiety about the ability of Greece and other European nations to service their sovereign debt. This anxiety has a series of knock-on effects that include tighter lending conditions imposed by banks exposed to impaired government debt; declining consumer confidence resulting in lower spending; dampened growth caused by governments? attempts at cutting deficit; and volatile exchange rates. Exchange rate jitters have already been witnessed?the euro fell sharply after the Greek debacle and is currently down nearly 12% against the dollar since the start of the year.
This skewed set of risks poses a dilemma for policymakers. The IMF proposes ?rapid?, ?concerted? and ?credible? efforts, particularly on fiscal policy. While economists argue that actively cutting deficits at this stage would only serve to choke growth (the IMF agrees), it is important that countries not add further stimulus. However, the medium to long-term targets, at a global level, should be to lower deficits, while ?maintaining supportive monetary conditions and rebalancing global demand?. However, this is easier said than done in an environment of constrained fiscal policy, with most central banks already having cut interest rates to close to zero, leaving the dagger of contagion hanging over the cautious optimism about the pace of recovery.
?feedit@expressindia.com