World economy to strengthen modestly in 2013, says IMF

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 The global economy is poised for a gradual upturn in 2013 as the constraints on growth gradually ease, but policy complacency should be guarded against as risks remain, the International Monetary Fund (IMF) said in its updated World Economic Outlook (WEO) on Wednesday.

The report observed that economic conditions improved modestly in the third quarter of 2012, driven by acceleration in emerging economies and the United States. Global financial conditions improved further in the fourth quarter of 2012 with sovereign spreads in weak euro area countries declined considerably.

However, in the euro area, the return to recovery after a protracted contraction is delayed, and Japan moved into recession in the second half of 2012, said the report.

CAUTIOUS OPTIMISM AMID MODEST IMPROVEMENT

The 188-member IMF predicted that world output would rise 3.5 percent in 2013, a modest uptick from 3.2 percent in 2012. But the figure was slightly lower than the Fund’s last projection made in October.

“Optimism is in the air, particularly in financial markets. And some cautious optimism may indeed be justified,” said IMF Chief Economist Olivier Blanchard at a news conference.

Advanced economies were expected to grow at a rate of 1.4 percent in 2013, a 0.2-percentage-point downward revision from the projection of October 2012.

The IMF forecast a contraction of 0.2 percent this year in the eurozone, which remains a large source of downside risk to the global outlook.

The U.S. economy is predicted to advance 2 percent in 2013 on the assumption that the spending sequester will be replaced by back-loaded measures.

Japan’s stimulus package and monetary easing will help boost growth in the near term, pulling the country out of a short-lived recession, the report noted. The Japanese economy is expected to expand 1.2 percent in 2013.

Growth in emerging markets and developing economies is projected to accelerate from 5.1 percent in 2012 to 5.5 percent in 2013, as supportive policies have underpinned much of the recent acceleration in many economies.

China’s growth rate is expected to pick up to 8.2 percent in 2013 from 7.8 percent in 2012.

Blanchard noted that progress has been made on U.S. fiscal problems as well as Europe’s firewall against debt crisis. Meanwhile, most emerging markets have been able to offset the decreasing external demand coming from the weakness of the advanced countries, and have been able to handle the volatility of the capital flows.

RISKS REMAIN WITH UNFINISHED JOB

“Comparing to where we were the same time last year, acute risks have decreased,” said Blanchard. “But we should be under no illusion” as considerable challenges remain ahead, he added.

“If crisis risks do not materialize and financial conditions continue to improve, global growth could be stronger than projected,” the IMF said.

“However, downside risks remain significant, including renewed setbacks in the euro area and risks of excessive near-term fiscal consolidation in the United States. Policy action must urgently address these risks,” it cautioned.

The IMF also said that weaknesses in advanced economies will weigh on external demand, as well as on the terms of trade of commodity exporters.

Policy recommendations provided in the updated WEO report are largely the same as those in the previous version.

Risks of prolonged stagnation in the euro area as a whole will rise if the momentum for reform is not maintained, the IMF warned. Adjustment efforts in the periphery countries need to be sustained and must be supported by the core countries, including through full deployment of European firewalls, utilization of the flexibility offered by the fiscal compact, and further steps toward full banking union and greater fiscal integration.

The IMF underscored the need for developing countries to rebuild macroeconomic policy space. In China, ensuring sustained rapid growth requires continued progress with market-oriented structural reforms and rebalancing of the economy more toward private consumption, it noted.

The Fund also stressed that the priority for the United States is to avoid excessive fiscal consolidation in the short term, promptly raise the debt ceiling, and agree on a credible medium- term fiscal consolidation plan focused on entitlement and tax reform.

 

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