Recover in Sight - the IMF Take on the World

The IMF has just released an update of its World Economic Outlook. The main news is that growth during 2009-10 is now set to be 0.5% higher than forecast by the IMF in April, reaching 2.5 percent in 2010. The IMF recognizes that they overestimated the size of the recession in both, US and Japan.

In the same report the Fund says that financial conditions have improved, as forceful policy intervention has reduced the risk of systemic collapse and expectations of economic recovery have risen. Clearly the world wide policy response in both - finance and macro - have minimized the risk of a systemic crisis and indeed improved market confidence. The IMF emphasized thatr recovery likely to be sluggish

Financial conditions have improved more than expected, owing mainly to public intervention, and recent data suggest that the rate of decline in economic activity is moderating, although to varying degrees among regions.

Despite these positive signs, the global recession is not over, and the recovery is still expected to be slow as financial institutions remain weak and credit intermediation impaired, support from public policies will gradually diminish, and households in countries that suffered asset price busts will rebuild savings.

According to the IMF the main policy priority remains restoring financial sector health. Macroeconomic policies need to stay supportive, while preparing the ground for an orderly unwinding of extraordinary levels of public intervention. At the same time, given weak internal demand prospects in a number of current account deficit countries, including the United States, policies need to sustain stronger demand in key surplus countries.

For the IMF:

"In the United States, high-frequency indicators point to a diminishing rate of deterioration, including in the labor and housing markets. Industrial production may be close to bottoming out, the inventory cycle is turning, and business and consumer confidence has improved. These developments are consistent with stabilization of output during the second half of 2009, with a gradual recovery emerging in 2010.

In Japan, following a dismal first quarter, there are signs that output is stabilizing. Improved consumer confidence, progress in inventory adjustment, aggressive fiscal policies, and strong performance by some other Asian economies are expected to lift growth in the coming quarters.

In the euro area, consumer and business survey indicators have been recovering, but data on real activity show few signs of stabilization and thus activity is projected to strengthen more slowly than elsewhere. Macroeconomic policies are providing support, but much of the adjustment in the labor market still lies ahead. Rising unemployment will weigh on consumption and activity, as will the economy’s heavy dependence on a still-ailing banking sector.

Emerging and developing economies are projected to regain growth momentum during the second half of 2009, albeit with notable regional differences. Low-income countries are facing important challenges because official aid has fallen and these economies are particularly vulnerable to swings in commodity prices."

In brief, EM will grow by only 1.5% in 2009 but will rebound to 4.7% in 2010. China will grow by 7.5% in 2009 and 8.5% in 2010. India will also present high rate of growth of 5.4% in 2009 and 6.5% in 2010. Asia will contract by 0.3% in 2009 before growing 3.7%. In contrast, some regions will post negative growth: Latin America (-2.6), Eastern Europe (-5) and CIS (-5.8).