IMF slashes global growth forecast
The International Monetary Fund’s (IMF) latest World Economic Outlook says the global economy is expected to continue mending gradually. The IMF now projects 3.3 per cent global economic growth in 2013, down 0.2 per cent on previous estimates, and an unchanged rate of four per cent in 2014.
Growth in emerging market and developing economies is forecast to reach 5.3 per cent in 2013 and 5.7 per cent in 2014. Growth in the United States is forecast to be 1.9 per cent in 2013 and 3.0 per cent in 2014. In contrast, growth in the euro area is forecast to be –0.3 per cent in 2013 and 1.1 per cent in 2014.
Global economic conditions have improved during the past six months. Advanced economy policymakers successfully defused two of the biggest short-term risks to global activity—the threat of a euro area breakup and a sharp fiscal contraction in the United States. Financial markets have rallied in response, and financial stability has improved, according to the IMF's latest World Economic Outlook.
Olivier Blanchard, Chief Economist, IMF, commented, “I think it's useful to think of a three-speed recovery. So at the top you have emerging markets, who have been doing well, are doing well. You always worry, but, fundamentally, they're in good shape. Then you have the US, which seems to really be on a fairly strong recovery path. And then at the bottom, and very worrisome, you have the third speed or not speed at all, which is Europe or, more specifically, the countries of the euro where, you know, we have more or less zero growth, negative growth in some countries.
“I think the main challenge is still very much in Europe. The US is doing better, emerging markets are doing fairly well. Europe is still the issue. What you have is weak banks, weak governments, low growth, and there's always a danger when the things are there together. Then they build on each other and then things go from bad to worse. That's the issue.”
The IMF sees an improved picture across most of the world in terms of countries getting a handle on their deficits. Many countries have also taken important first steps to bring overall debt down to levels needed to ensure strong and vibrant economies. But persistent high levels of debt still pose risks to future economic prosperity. "Unfortunately those risks remain elevated", says Carlo Cottarelli, Director of the Fiscal Affairs Department at the IMF. "The fiscal accounts are not in a great shape in advanced economies but they are improving. We have considerable reduction in deficits. Over the last few years, there has been a considerable reduction. We project deficits to be about half of what they were on average in 2009. The other good news is that market sentiment, the propensity of markets to take up risks has improved which also makes things easier. But of course, there are still important challenges. Public debt is still quite high and is still rising in several of these advanced economies.
"The situation of emerging economies from a fiscal perspective is better than the situation of advanced economies in many, many cases. Of course, there are areas of vulnerabilities. One is the Arab countries in transition where deficits are high, debts in some countries like Egypt, Jordan, remains quite high and that's an issue that needs to be addressed. You also have less urgent problems, important problems over the medium terms in large countries like India. India still has a very high debt to GDP ratio and the deficit is also very high. As I said, it's not urgent but there should be further fiscal adjustment in India. One tool to implement fiscal adjustment in several of these countries would be the reduction of subsidies, including energy subsidies which are inefficient, do not help the poor and they are very costly for the government."
Outlook for oil
Crude oil prices have remained relatively stable—albeit high—since early 2011, said the IMF, with the average selling price near $105 a barrel during the past two years. Prices have been supported by outages due to geopolitical events in several countries in the Middle East and Africa, the European Union oil embargo and US sanctions against Iran, and other unexpected outages, such as in the North Sea.
Weaker aggregate demand (proxied by the log change in global industrial production) and declines in other demand components (that is, inventories), along with a positive oil supply response, explain the downward pressure on the spot crude oil price during the second and third quarters of 2012.
World oil demand grew by one per cent, or 0.9 million barrels a day (mbd), in 2012, with a decline of 0.6 mbd in the Organisation for Economic Cooperation and Development (OECD) countries and growth of 1.5 mbd in non-OECD countries.
Oil demand in the OECD has fallen by nine per cent (or 4.5 mbd) since 2005 as a result of higher prices, greater efficiency, and recession—factors that are expected to affect developments into 2013 and beyond. While emerging market demand has moderated from its rapid growth in recent years, demand picked up by 1.6 mbd during the second half of 2012, led by Brazil, China, and countries in the Middle East and Asia. OPEC remains concerned about weak demand and rising supply and has announced its desire to keep oil prices around $100 a barrel, which generally satisfies its relatively high break-even requirements.
MENA region, two-speed differences narrowing
Economic performance across the Middle East and North Africa was again mixed in 2012, said the IMF. Although most of the region’s oil-exporting countries grew at healthy rates, economic growth remained sluggish in the oil importers—many of which are undergoing political transitions.
In 2013, these differences are expected to narrow because of a scaling back of hydrocarbon production among oil exporters and a mild economic recovery among oil importers. Many countries face the immediate challenge of reestablishing or maintaining macroeconomic stability amid political uncertainty and social unrest, but the region must not lose sight of the medium-term challenge of diversifying their economies, creating more jobs, and generating more inclusive growth.
Growth in the MENA region was relatively robust at 4.75 per cent in 2012, but is expected to weaken to about threeper cent in 2013 largely because of an expected slowdown among oil exporters.
For MENA oil exporters, 2012 was a year of robust growth, which reached about 5.75 per cent, driven largely by the almost complete restoration of Libya’s oil production and strong expansions in the Gulf Cooperation Council countries. Economic growth is projected to fall to 3.35 per cent in 2013 as oil production growth pauses against a backdrop of relatively weak global oil demand.
Additional oil supplies from Iraq and Libya are expected to more than offset a decline in oil exports from Iran this year, while lower net demand for Saudi Arabian exports is expected to result in slightly reduced production. As a result, aggregate oil GDP is expected to stagnate in 2013, compared with growth of 4.5 per cent recorded in 2012.
Sustained high government spending will continue to support buoyant non-oil GDP growth, expected at 4.25 per cent this year. Overall, growth in the oil exporters of the region is projected to strengthen to about 3.75 per cent in 2014 on the back of rising non-oil GDP growth and resuming oil GDP growth.