With the federal government shutdown in the United States, there is much more focus on international monetary agencies and non-governmental economic reports. The calls from the International Monetary Fund (IMF) often may fall on deaf ears, but the reality is that the rest of the world, particularly the emerging market nations, also are being held hostage by the U.S. government closure and the debt ceiling cap coming in the middle of October. The latest IMF report on the world economic outlook brings some grim possibilities back to mind.
The IMF is signaling that the economic risks now point more to the downside as the risks to the global economy are rising. The IMF even calls for urgent policy actions to keep the global economy growth above subpar levels. This is something we also pointed out in a recent 24/7 Wall St. report on the nations drowning under inflation.
What was hard to ignore is the IMF call for the Federal Reserve to exit the quantitative easing program at a gradual pace and with much caution. The IMF simultaneously asks the Federal Reserve to very clearly communicate its strategy as well. A risk is that the formal tapering will tighten monetary conditions beyond even what the mention of possible tapering did to the economies.
The IMF also said that a prolonged government shutdown in the United States could prove to be quite harmful. The IMF’s chief economist is forecasting that failing to raise the federal government debt ceiling would be a major event, followed by extreme fiscal consolidation. In fact, the warning is that this almost certainly would derail the financial recovery.
The IMF summary in its World Economic Outlook says:
Global growth is in low gear, and the drivers of activity are changing. These dynamics raise new policy challenges. Advanced economies are growing again but must continue financial sector repair, pursue fiscal consolidation, and spur job growth. Emerging market economies face the dual challenges of slowing growth and tighter global financial conditions.
The IMF has lowered U.S. growth assumptions for 2013 to 1.6% from a 1.7% projection made in July. This new data is in the latest World Economic Outlook and comes ahead of the IMF and World Bank annual meetings set for later this week.
Other assumptions from the IMF for 2013 and 2014 are as follows:
- The average price of oil will be $104.49 a barrel in 2013 and $101.35 a barrel in 2014, and it will remain unchanged in real terms over the medium term.
- The six-month London Interbank Offered Rate (LIBOR) on U.S. dollar deposits will average 0.4% in 2013 and 0.6% in 2014.
- The three-month euro deposit rate will average 0.2% in 2013 and 0.5% in 2014.
- The six-month Japanese yen deposit rate will yield on average 0.2% in 2013 and 0.3% in 2014.
- Output in advanced economies is expected to expand at about 2% in 2014, about three-quarters of a percentage point more than in 2013.
- Emerging market and developing economies are projected to expand by about 5% in 2014, as fiscal policy is forecast to stay broadly neutral and real interest rates to remain relatively low.
- Unemployment will remain unacceptably high in many advanced economies, as well as in various emerging market economies, notably those in the Middle East and North Africa.
One warning came in the report that the end of quantitative easing might tighten conditions to the point that the global economy could grow by only slightly more than 3% a year over the medium term, instead of reaccelerating to more than 4%. The report also pointed out, “What is more worrisome, monetary policy in the advanced economies could be stuck at the zero interest bound for many years.”