Despite recent turmoil, IMF “cautiously optimistic” about global economy’s resilience

Sources: IMF: The Global Economy and Financial Turmoil: Finding our Footing

In advance of the forthcoming publication of its highly anticipated yearly economic analyses-the World Economic Outlook and the Global Financial Stability Report-IMF First Deputy Managing Director John Lipsky gave a first look at the Fund’s impressions of the current global economy this week.  He expressed “cautious optimism” about the prospects for avoiding a global recession, but emphasized the need for “clear and coherent” policy responses from governments around the world.

Citing three shocks to the global economy: high energy and commodity prices, the housing market crisis in the US and other advanced economies, and the recent, and ongoing, financial turmoil, he laid out their potential effects and his reasons for optimism that a “gradual recovery” will continue.

First on the list of encouraging developments was the recent decrease in oil prices, which should lead to increased consumer consumption with a potentially greater effect in the US than the income tax rebates given earlier this year.  Second was what he characterized as the “plausible” anticipation that the US housing market will bottom out in 2009, reducing that market’s current drag on GDP.  He also highlighted relatively robust growth in emerging markets, resulting in increased exports to those countries, which has supported US growth as the relatively low value of the US dollar further encourages export growth.  Last, and perhaps most importantly, he cited recent research by the IMF indicating that a credit crunch does not necessarily foreclose overall economic recovery, particularly given the strength of American corporate finances and productivity. 

In the speech, which was delivered at the Center for Strategic and International Studies in Washington DC, Mr. Lipsky praised the American government’s decision to bail out mortgage giants Fannie Mae and Freddie Mac, but said that a “more systematic” approach might be warranted.  This suggestion turned out to be quite prescient as it was given just one day before the American government announced its plan to systematically buy “toxic” assets from troubled institutions.

Despite the global challenges and the increased risks from this past week’s financial meltdown, the IMF projects that global growth will be around four percent for 2008 and just under four percent in 2009, a relatively small decrease from the 4 and three quarters increase seen in 2007.

Discussion:

Do you think the IMF is overly optimistic about the state of the global economy?  What are some possible global implications of the current instability in the financial world?