Growth prospects for world economy: CARE Ratings

The IMF has presented a gloomy picture of the global economy saying that prospects have deteriorated further and risks increased. This means that hopes of a global economic recovery in 2012 have dimmed and may be expected only from 2013 onwards. Therefore, all the measures that have been attempted by central banks and governments across the globe to revive their economies have at best helped to ensure that their economies do not go further down.

Most indicators show economic sluggishness in the first half of 2012 and no significant improvement in the third quarter. Global manufacturing has slowed sharply and the euro area periphery has seen a marked decline in activity driven by financial difficulties evident in a sharp increase in sovereign rate spreads. Spill over from advanced economies and home grown difficulties have held back activity in emerging market and developing economies.

Policy tightening in response to capacity constraints and concerns about the potential for deteriorating bank loan portfolios, weaker demand from advanced economies, and country-specific factors slowed GDP growth in emerging market and developing economies from about 9% in late 2009 to about 5.25% recently. Indicators of manufacturing activity have also been retreating for some time.

Some of the risks are:

• A further deepening of the euro area crisis
• The euro area crisis could re-intensify again
• The US debt ceiling and fiscal cliff could entail significantly more fiscal tightening
• A renewed spike in oil prices.

Highlights:

• Overall, the IMF’s forecast for global growth was marked down to 3.3% this year and 3.6% in 2013.
• Advanced economies are projected to grow by 1.3% this year, compared with 1.6% last year and 3.0% in 2010, with public spending cutbacks and the still-weak financial system weighing on prospects.
• Growth in emerging market and developing economies was marked down compared with forecasts in July and April to 5.3%, against 6.2% last year. Leading emerging markets such as China, India, Russia, and Brazil will all see slower growth.
• Growth in the volume of world trade is projected to slump to 3.2% this year from 5.8% last year and 12.6% in 2010.

Two assumptions have been made here - that European policymakers get the euro area crisis under control and that policymakers in the United States take action of tackle the “fiscal cliff” and do not allow automatic tax increases and spending cuts to take effect. Failure to act on either issue would make growth prospects far worse.

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