Friday, January 20, 2012

IMF Economic Outlook 2012

The IMF definitely has its critics (see: Criticisms of the IMF). In the past the IMF has often been accused of imposing on countries harsh austerity measures, plus free market reforms, such as privatisation and spending cuts which have increased inequality and unemployment.

Recently, the IMF have often warned over the dangers of austerity measures which push economies back into recession. At the end of last year, Oliver Blanchard reported on dangers of self-defeating austerity (see: previous post: Is UK at risk from Eurozone crisis?) These seem a good evaluation of the situation, and it would be good if European politicians payed closer attention.

Yet, there are also inconsistencies in the IMF approach. Usually, if countries hard large current account deficits and negative growth, the IMF would advocate devaluation to restore competitiveness. But, despite record current account deficits in the Eurozone, the IMF still retain support for trying to make the Euro work. Thus, although theoretically, they are aware of the dangers of austerity and over-valuation, they haven't offered any alternative to the Eurozone.

As a consequence of the Euro crisis, the IMF have slashed its growth forecasts for the Eurozone for 2012 from economic growth of 1.1% to a recession with negative growth (-0.5%)

In southern Europe, the growth forecasts are even worse, with Italy forecast to show negative growth of 2.2%. The UK is forecast to stay in an effective 'growth recession' with feeble growth of 0.6% This is very poor given the negative output gap and rate of unemployment. But, it makes the UK have one of the highest growth rates in the EU (but - hardly cause for rejoicing). The main engines of growth will be China. More hopefully, is the predicted recovery of the US economy with growth of 1.8%.

Failure to Understand Deflationary Policies are Deflationary

Though the IMF have issued warnings about the dangers of rapid fiscal consolidation before economic recovery. The IMF, like other institutes have repeatedly underestimated the capacity for spending cuts and fiscal austerity to push economies back into recession.

The EU has expended considerable energy on the need for fiscal consolidation in southern Europe, without allowing for the impact on growth and tax revenues. This was a repeated theme of 2011 (Austerity in Europe) which at the moment shows no sign of changing.

1 comment:

Paul said...

thanks for this post. I especially think #1 is a great tip., This post makes a great point about focusing your efforts.

stock tips,equity tips | Currency Trading Tips,Forex Tips,Forex Pairs