Jul 20 2012
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Global Economics: IMF Cast Doubts over Global Economic Outlook IMF More Pessimistic About Global Growth
KFH-Research: Recovery of global economy is fragile
- Risks of Euro crisis and American budget increase pessimism regarding global economy
- Growth expectations fall to 3.5-3.9% for 2012-2013 respectively
- Expectations concerning growth of region's economies remain high
On the contrary of America and the Euro region, the countries of the region seem to be in a better status, where the IMF maintained its previous expectations regarding the significant growth rate at 6.5% this year.
The International Monetary Fund (IMF) slashed its global growth projections to 3.5% in 2012 and 3.9% in 2013, from its earlier projections of 3.6% and 4.1% respectively in the April 2012 World Economic Outlook. The fund attributed the more pessimistic forecast to signs of further weakness in the past three months, resulting in downside risks continuing to loom large in the guise of mounting risks from the Euro-zone debt crisis, US budget issues and slowing emerging economies.
Stress in the Euro-zone Ratcheted Up
The fund said the Euro-zone periphery has been at the epicentre of a further escalation in financial market stress, triggered by increased political and financial uncertainty in Greece, banking sector problems in Spain, and doubts about governments' ability to deliver on fiscal adjustment and reform as well as about the extent of partner countries' willingness to help. As a result, measures of financial stress in weaker European countries have returned to the crisis levels seen late last year. While the ECB's two Long-Term Refinancing Operations (LTRO) have had a somewhat stabilising effect on financial markets, borrowing costs are again surging for Italy and Spain. Thus, the IMF said that the ECB may need to take more action to support the Euro-zone economy, such as government-bond purchases, more financing moves to support banks, or asset purchases known as quantitative easing to tame the runaway borrowing costs.
Against this backdrop, the IMF revised its forecast for Eurozone's growth to 0.7% in 2013, from its earlier projection of 0.9%. The fund attributed the downward revision to weaker activity in the Euro-zone, especially in the periphery economies, where the dampening effects from uncertainty and tighter financial conditions will be strongest. According to the IMF, growth in most other advanced economies will also be slightly weaker, owing mainly to negative spill-overs, although lower oil prices will likely dampen these adverse effects.
Slowing Emerging Economies and Dimming US Outlook
The IMF also expects growth in emerging and developing economies to moderate to 5.6% in 2012 before picking up to 5.9% in 2013, a downward revision of 0.1 and 0.2 percentage point in 2012 and 2013, respectively, relative to the April 2012 WEO.
Although the IMF said that activity in many emerging market economies is expected to be supported by the policy easing that began in late 2011 or early 2012, growth is expected to remain relatively weaker than in 2011 especially for countries with closer trade linkages with Europe.
We are in agreement with this view, given that China - the world's second largest economy - only grew by 7.6% y-o-y in 2Q12, marking the slowest pace of growth in three years. Still, we believe that China will likely avoid a hard-landing as it still has plenty of policy ammunitions left to bolster its growth.
Over in the US, as we have mentioned in a previous report, the IMF has also downgraded its growth forecast to 2.0% in 2012 and 2.3% in 2013, from 2.1% and 2.4% respectively, mainly due to recent data pointing to less robust growth. While distortions to seasonal adjustment from the unusually mild winter may explain some of the softening, it believes that the economy is showing an underlying loss of momentum. Going forward, the IMF believes that avoiding the "fiscal cliff", promptly raising the debt ceiling, and developing a medium-term fiscal plan are essential in ensuring its recovery stays on track.
The IMF revised upwards its 2012 GDP outlook for the Middle East and North Africa (MENA) region to 5.5% y-o-y from its earlier projection of 4.2% y-o-y, as key oil exporters continue to boost oil production and domestic demand while activity in Libya is rebounding rapidly after the unrest in 2011.
We are in line with the IMF and expect the MENA region to record GDP growth of 5.5%-6.0% y-o-y in 2012, on expectations of political stability in the oil importing countries and continuous support from the hydrocarbon sector in the oil exporting countries (Algeria, Bahrain, Iran, Iraq, Kuwait, Libya, Oman, Qatar, Saudi Arabia, Sudan, UAE and Yemen).
Improving political and economic reforms in the oil importing countries will provide more equal access to economic opportunities; better access to credit by strengthening financial market infrastructures and enhancing the business environment.
Meanwhile, the oil exporting countries contribute approximately 81.0% of the MENA region's GDP. Within the oil exporting countries, the Gulf Cooperation Council (GCC), which contributes about 50.0% of the MENA region's GDP, faces lesser adverse effects from the political instability buffered by the robust hydrocarbon sector. We believe that the recovery of oil production in Libya is likely to more than offset the decline in production and exports in Iran due to sanctions, while capacity expansion continues in Iraq.
We also think oil supply disruption from Iran may give less impact to global supply, as the GCC accounts for more than 25.0% of global oil supply. For instance, Saudi is expected to increase further its oil production in 2H12 to accommodate additional cuts in Iran's oil production. Although there is a downward trend of crude oil prices in the recent months, the GCC's oil sector is still faring well on the back of increasing crude oil production. Hence, we forecast the GCC region will record an impressive GDP growth of 6.5% y-o-y in 2012 compared with 6.0% y-o-y estimated for 2011.
Overall, we believe that the IMF's report further reinforces our view that downside risks to the global economic recovery still loom large. Indeed, even the latest IMF forecasts were also predicated on the assumptions that there will be sufficient policy action in the Euro-zone to address the worsening financial conditions in the peripheral countries and that recent policy easing in emerging market economies will gain traction. Given the precarious nature of these assumptions, we maintain our view that the global economic recovery still remains fragile.
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