The International Monetary Fund expects the world economy to continue growing moderately in the next 18 months, but that forecast, made early today in its latest World Economic Outlook, hides some sharp swings.
For Australia, the fund not only sees our growth expanding over the next year and a bit, but our major trading partners China and India will see solid growth in both years, but it will be a bit slower in 2011.
Japan won’t be so solid, weak in fact, while America will continue to struggle with high jobless and low growth .
In the first update to its forecasts since July, the IMF said that growth in the first half of the year had turned out slightly stronger than it had expected, with the global ecnomy expanding at an annualised rate of 5.25%.
The fund said the global economy would probably grow at 4.8% in 2010 and slow to 4.2% next year, little changed from its previous projections.
That would far surpass the 0.6% fall in 2009, the worst since World War Two.
The IMF’s forecast for worldwide growth this year is 0.2% more than its previous estimate in July.
But the US economy has seen its growth estimates slashed for 2010 and 2011 in the most dramatic change from the previous estimates.
China’s growth remains on par for two solid years, German growth will be better than thought earlier this year, India will slow a but in 2011, and Australian growth is estimated at 3% this year and 3.5% in 2011, which is where the Federal treasury and Reserve Bank believes it to be.
India, which is a top three trading partner of Australia’s, will see growth of 9.7% this year and 8.4% next year.
The IMF expects advanced economies to have a combined growth rate of 2.7% this year, and 2.2% in 2011 (that puts Australia above this level and makes us an outperformer).
The IMF said activity in more established nations, including the US, could slow "noticeably" over the coming months before activity picks up in a year’s time.
By contrast, emerging economies are forecast for growth of 7.1% this year and 6.4% in 2011.
The IMF said the Asian region would lead the global recovery, growing by 7.9% this year and 6.7% next year.
China’s growth is projected to average 10.5% this year and 9.6% in 2011, mainly driven by domestic demand, according to the Fund.
That’s a bit stronger than the forecasts from the Asian Development bank a week ago. (9.1% in 2011, for example).
The euro zone economy will grow by 1.7% this year and 1.5% next year, with German growth for this year the standout at 3.3%, slowing to 2.0% in 2011 as austerity measures and the impact of a stronger euro kick in.
The UK will be a rare example with growth of 1.7% this year expanding to 2% in 2011.
In Japan, the IMF expects the output to rise by 2.8%, falling to just 1.5% (about where it is at the moment)in 2011. That of course is better than the 5.2% slump in 2009.
Weak growth in the US has led to renewed speculation that the US Federal reserve will engage in a second round of quantitative easing (spending more money on buying bonds and securities, as the Bank of Japan recommended this week.
The IMF said that such a move could be justified in the near future if data for the US economy continued to be weak.
“In the event that such risks materialise, policy responses could include a strengthened commitment to maintaining the ultra-low policy rate for an extended period, expanding asset purchases, and relaunching facilities to aid stressed markets,” it said.
he Fund hacked its US forecast back to 2.6% for this year from the previous 3.3%, and down to 2.3% in 2011 from the previous 2.9%.
"The most likely prospect for the U.S. economy is for a continued but slow recovery, with growth far weaker than in previous recoveries, considering the depth of the recession," the IMF said.
The US unemployment rate will average 9.7% this year and 9.6% in 2011, meaning no change from the level reported last month. In April the Fund estimated unemployment would be 8.3% in 2011.
The IMF said the main reason the US recovery is so weak is that consumer spending is sluggish and suggests it is little wonder that is the case.
Falling home prices have reduced household wealth, 9.6% of the workforce is unemployed, banks won’t lend and people are scared into saving.
It says the gap between actual and potential economic output will be a lingering drag on the pace of recovery.
"The unemployment rate is therefore expected to remain stubbornly high," it warns, which further hinders consumption spending that is the largest component of U.S. GDP.
"Risks to the outlook remain elevated and are tilted to the downside," the IMF said, noting that real estate markets are "still fragile" and soaring government debt has created worry in financial markets.
The IMF said there was "a tail risk of deflation" arising from soft consumer prices, weak labor markets and consumers’ increased wish to save instead of spend.
Despite this concern, it still urged that the Federal Reserve maintain its policy of very low interest rates to try to spur subpar growth and to offset lingering financial strains.
Australia doesn’t look too bad in comparison, does it?
China, India and Asia generally will see slower, but still faster growth than elsewhere in 2011.
This suggests that the pressure on interest rates next year from our booming terms of trade and commodity exports might not be as strong as in 2010.
