NOT 2009 ALL OVER AGAIN...
If everything goes right:
Global growth: 4%
Euro nations: 1.6%
United States: 1.5%
United Kingdom: 1.1%
“Severe repercussions for global growth”
Recession in the US and Euro nations
“Significant damage” to other economies
“Abrupt declines” in trade and commodity prices
IMF World Economic Outlook, 2011 forecasts
The International Monetary Fund has slashed its economic forecasts for Australia, warning of a new global recession that would hit commodity prices and drive millions into unemployment worldwide.
Hours before the Fund published its unexpectedly gloomy update in Washington, Australia’s Reserve Bank released its own statement expressing concern about the global outlook and opening the way for interest rate cuts should things deteriorate.
The Australian dollar slid to a five-week low of 102 US cents on renewed concerns about Europe after Italy lost its A+ credit rating. Australian shares lost one per cent.
The IMF says Australia will grow at just 1.8 per cent this year, down from its previously forecast 3 per cent. The forecast is way below the May budget forecast and only half the most recent Reserve Bank forecast, suggesting it’ll harder than expected to reach the promised 2012-13 budget surplus.
For 2012 the Fund forecasts a better 3.3 per cent, down from 3.5 per cent.
But it takes trouble to point out these are best-case forecasts, made on the assumption almost everything goes right.
It’s best case is for “anemic” growth in the advanced economies of 1.6 per cent and for global growth of 4 per cent.
“However, this assumes European policymakers contain the crisis in the euro area periphery, that US policymakers strike a judicious balance between support for the economy and medium-term fiscal consolidation, and that volatility in global financial markets does not escalate,” the Fund says.
If one or more of its best-case scenarios don’t eventuate the United States and much of Europe could slide back into recession... commodity prices could slide “abrupty,” and much of the rest of the world would be face a repeat of the 2009 global financial crisis.
The update is prefaced by an unusual apology.
Chief economist Olivier Blanchard says he “largely failed to perceive” the slowdown as it was happening earlier in the year, wrongly blaming it at first on one-off events such as the Japan’s earthquake and tsunami.
“Now that the numbers are in, it is clear there was more going on,” he says. “What was going on was the stalling of two rebalancing acts; the shift from fiscal stimulus to private demand within nations and a rebalancing of trade between them.”
“Markets have clearly become more skeptical about the ability of many countries to stabilise their public debt. As time has passed their worries have extended to countries from Japan to the United States. These worries have led to a partial freeze of financial flows.”
So uncertain is the Fund of the best way forward it stops short of offering advice, saying merely the right approach depends on “individual country circumstances”. The usual advice of tighter budgets could “lead to even lower growth”.
The Fund says Australia is in about the best fiscal position of any developed country, having the second-lowest government debt of 29 advanced economies, being beaten only by Estonia.
Treasurer Wayne Swan who is about to travel to Washington for the weekend IMF and World Bank annual meetings said the update was a “stark warning,” indicating the global economy had entered “a dangerous new phase”.
The Reserve Bank expressed concern about “extreme volatility in financial markets” reflecting fears about a global slowdown and an escalation of debt troubles in the United States and Europe.
It would pay attention to these developments in deciding how to move rates.
Financial markets economist Stephen Koukoulas, until recently Prime Minister Gillard’s economic adviser, tweeted: “Bank open on rates outlook, smells like cuts on the menu.”
Published in today's SMH and Age
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