Tuesday, February 01, 2011

IMF Releases Most Recent World Economic Outlook


WSJ: IMF Sees Europe's Debt as Top Recovery Threat
NYT: I.M.F. Says European Debt Still a Threat to World Recovery
BBC News: IMF Predicts Faster Global Economic Growth in 2011

In its most recent World Economic Outlook, the International Monetary Fund (IMF) projected that the world would experience higher than expected economic growth in 2011. The IMF made an upward revision to its forecast of global output for the upcoming year, predicting that global GDP would increase by 4.4% instead of 4.2%.

The optimism generated by this upward revision is muted, however, by the fact that the advanced economies of the world are growing at a very different speed than emerging and developing economies, a phenomenon the IMF calls a “two-speed” recovery. For purposes of the IMF’s report, the IMF considers the following nations “advanced economies:” the United States, Germany, France, Italy, Spain, United Kingdom, Canada, Japan, and an undefined category of “other advanced economies.” The countries not included in the definition of “advanced economies,” are, by default, considered emerging or developing economies. The IMF classifies the BRIC countries (Brazil, Russia, India, and China) as emerging or developing.

The report projects that advanced economies will grow only by 2.5% in 2011. The report cites the problems in Europe as the number one threat to economic growth, where several nations are struggling to control large fiscal deficits and banks are likewise having trouble staying in business without the assistance of bailouts. If these problems worsen, it could negatively affect market confidence even further than it already has, which would inhibit investment and, thus, economic recovery and growth. To counteract the potential impact of these problems, the IMF expressed its support for a strengthened European Financial Stability Fund (EFSF), the lending capacity of which the IMF considers too weak to support the deficits of the most troubled economies in Europe (e.g. Ireland, Spain). The European Union (EU) member states created the EFSF in response to the fiscal difficulties experienced by several EU nations. The EFSF is authorized to offer financial assistance, via loans guaranteed by non-distressed EU states, to distressed EU countries to help fund their debt obligations. Currently, the EFSF is capable of lending a maximum aggregate amount of €440 billion.

In contrast to the relatively low growth projected in advanced economies, the IMF’s report projects an average 6.5% growth rate in developing and emerging economies. China and India, which are expected to grow at rates of 9.6% and 8.4%, respectively, are expected to grow the most. While the increased economic growth rates of these countries may appear to be good news, the IMF report points out that such rapid growth can also be a bad thing because of its inflationary effect. Some inflation indicates a healthy, growing economy, but rapid inflation can negatively affect a country’s economy if it grows too fast relative to wages because it diminishes the purchasing power of the country’s citizens.

The IMF’s report mentions that the inflationary concerns in emerging and developing economies are made worse by the risk of increased capital inflows to these countries. As developed economies are attempting to increase economic growth by inducing greater lending through low interest rates, investors seek the higher rates offered in emerging and developing economies. Such attractive rates, combined with the lucrative business opportunities in these growing economies, cause foreign investors to flood the emerging economies with capital inflows. The increased capital gives emerging and developing economies additional funds to stimulate economic growth, which, in turn, further accelerates inflation.

Discussion Questions:
1.) Do the increased growth rates in emerging and developing economies mean that there is increasing success in the efforts to bring those economies to the same level of economic progress as the rest of the “developed” world?
2.) As mentioned above, the IMF indicates that sovereign debt problems and bank troubles in Europe are the main threats to global growth? Do you agree? If not, what other problems pose greater threats to global economic growth in the upcoming year?

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