IMF: The global economy keeps growing except Eurozone

Economic Counsellor and Director of the Research Department of IMF, Olivier Blanchard answers questions from the press after their joint press conference on the World Economic Outlook April 16, 2013 at the IMF Headquarters in Washington, DC. (IMF Staff photograph/Stephen Jaffe).

IMF’s research department published yesterday its latest report on World Economic Outlook (WEO), with good news for the global economy and bad news for Eurozone. Actually, Olivier Blanchard, IMF’s chief economist and director of its Research Department, was quoted as saying that because of Eurozone’s problems, “We have moved from a two-speed recovery to a three-speed recovery. Emerging market and developing economies are still going strong, but in advanced economies, there appears to be a growing bifurcation between the United States on the one hand and the euro area on the other.”

According to the WEO real global GDP will grow by 3.3% on an annual average basis in 2013, about the same as in 2012, while the IMF expects growth to rise to 4% in 2014. Developing and emerging economies will continue leading global growth this year and in 2014. The same source estimates that “in the US larger-than-expected fiscal adjustment is projected to keep real GDP growth to about 2% in 2013. In the euro area, real GDP is projected to contract by about ¼ percent this year before growing again in 2014”.

Overall IMF’s projections for the world economy can be judged as being in the positive side, with the exemption of Eurozone. Even the Japanese economy will start growing again given its new fiscal and monetary stimulus. As a result the GDP of the country of the rising sun is expected to increase by 1.5% in 2013, not at all a bad prospect after the many years of stagnation.

Do it like the BoJ

At this point is very interesting to note that the new relaxed monetary policies of the Bank of Japan, the central bank of the country, didn’t attract criticism by the other global players nor by the IMF, for causing a large devaluation of the yen. After the change at the helm of the BoJ, its new governor Haruhiko Kuroda, decided to decisively support the government’s plans to realise an ambitious spending programme, aimed at revitalising the economy through a number of infrastructure projects. The BoJ now keeps buying government bonds replenishing the executive’s coffers, thus performing a twofold task with its quantitative easing.

For one thing it provides the government with the financial means to realise an ambitious infrastructure programme. At the same time however this “free printing of yen”, has another major direct result generously devaluing the Japanese money. In this way exports are being technically subsidised becoming cheaper while imports are more expensive. The final result is that the cheaper yen helps the country’s economy start growing again. Of course this policy is very detrimental to the country’s main competitors in global markets, with China and South Korea first to take the heat.

The interesting thing is though that the West, the US and the EU, didn’t complain at all with this abrupt and technical devaluation of the yen vis-à-vis the dollar and the euro. An explanation could be that for one thing the American central bank, the Fed, does the same in the US. As for Eurozone the devalued Japanese money doesn’t seem much of a threat. As a result the traditional bonds between Japan and the West prevailed in this affair, letting China and South Korea pay the price.

The ‘European Sting’ follows this affair right from the beginning. The obvious lesson Eurozone can take from this new Japanese policy package is that the euro area could do the same. The two economic entities are very similar. Both Europe and Japan suffer or are threatened to endure a long period of negative economic development. Both currencies are comfortably sitting on foreign trade surpluses on goods and services transactions. Consequently they don’t run the risk of an uncontrollable devaluation. Last but not least both those two economic entities are confronted with losses of GDP.

Germany disagrees

The only difference is that in Eurozone there is no central government to drag the European Central Bank into a largely relaxed monetary policy. Unfortunately the most powerful Eurozone political executive is sitting in Berlin, with all the malaise this brings to the rest of euro area countries. Germany doesn’t care much about the woes of the others as long as its own economy is not threatened by recession. As result Berlin blocks every proposal for a revitalisation of Eurozone’s economy powered by the money printers, as the US and now Japan do.

Not only that but the Germans try to impose on everybody else their own austere and dry ideology about the economy. This means a neutral monetary policy despite a continuously falling inflation, presently at 1.7%, well below the ECB’s target of 2%. Still Germany insists that countries in deep recession for years like Greece, Ireland and Portugal or in stagnation like Spain, Italy and France must apply austere fiscal policies. At the same time the Eurozone financial market is so fragmented, that all those countries in trouble, except France, are completely cut off from ECB’s cheap money policy. As a result a large number of countries are invariably condemned to a bleak economic future (see George Pepper’s, “Everybody against Japan over yen’s devaluation” and Maria Milouv’s, “South Eurozone needs some…inflation and liquidity”).

Returning to IMF’s WEO, its authors estimate that “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”. Still the contrast remains between the growing US economy and a retreating Eurozone.

Overall in 2013–14, the divergences between the advanced economies are projected to narrow, says IMF. This means the US, Japan and hopefully Eurozone will converge on a mild growth path. If policymakers deliver on their commitments this WEO report anticipates continued easing of the brakes on real economic activity, and a strengthening of growth in the advanced economies as from the second half of 2013. IMF economists also predict that growth in emerging market and developing economies will remain robust, strengthening from about 5% in 2012 to 5.25% in 2013 and 5.75% in 2014. Activity in most of these economies has already picked up after a slowdown in 2012, thanks to resilient consumer demand, supportive macroeconomic policies, and a revival of exports.

All in all the world economy seems to have definitively recovered from the last financial and credit crisis. At least the developing economies appear able to drag the rest of the globe into a new growth period. Eurozone will remain however a big question-mark all along this year. If it doesn’t recover during the second half, its prospects for 2014 should be undercut.

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