Wednesday 21 September 2011

Global recession gathering pace.

Global recovery stalled, says IMF, but Australia well-placed to weather economic turmoil

The recovery from the global financial crisis has stalled and the world economy faces increasing danger of turmoil and recession, the International Monetary Fund has warned.

But the Australian economy has more scope to adjust than most countries, with the ability to slow its return to budget surplus if conditions get worse, and it will be buttressed by the continuing strength in Asia, the fund says.

In a bleak review of the global economy designed to spur action from finance leaders gathering for a G20 meeting in Washington this Friday, the fund's chief economist, Olivier Blanchard, admitted that he had misread the severity of this year's slowdown.

He said the Japanese earthquake and tsunami and the jump in the oil price following the Libyan uprising provided plausible explanations for lower growth earlier this year. The IMF had also thought some slowing would occur as business completed rebuilding depleted stocks.
However, in the forward to the fund's economic outlook, released overnight, Mr Blanchard says: "Now that the numbers are in, it is clear that more was going on. Downside risks are very real." The fund has trimmed its forecasts for Australia's growth by 0.2 per cent, projecting 1.8 per cent this year and 3.3 per cent next year. This is close to the Reserve Bank's 2 per cent forecast for this year but far short of the RBA's 2012 forecast of 4.5 per cent and suggests that resource investment will slow.

The IMF still sees Australia's inflation rising above the 3 per cent top of the RBA's target range, reaching 3.5 per cent this year and 3.3 per cent next year. The fund says that countries such as Australia, with strong government balance sheets and credible plans for eliminating deficits, should stand ready to slow the pace of their return to surplus if the risks in the world economy increase.

These risks dominated discussion at the Reserve Bank's September board meeting, according to minutes released yesterday. The RBA said the key question it faced was the extent to which the global financial tensions and domestic consumer caution would reduce the pressure on inflation. "Very little hard data were available, as yet, on which to base such judgments," the minutes said, indicating that rates were likely to remain steady until evidence emerged.

Wayne Swan said last night that the IMF had issued a "stark warning" and the world economy had entered a "dangerous new phase". "The global outlook as outlined by the IMF raises the stakes for major economies to take credible and swift action to address economic problems," the Treasurer said.

Mr Blanchard said there was no sign that private demand was making up for the winding down of government stimulus programs implemented during the GFC. The IMF said emerging countries, particularly China, were failing to spur domestic consumption. Both steps are vital to economic recovery, but Mr Blanchard said action was "stalling".

At the same time, financial markets have lost confidence in the ability of advanced countries to gain control over their sovereign debts. This had gone beyond the weakest economies of Greece, Portugal and Ireland to include major European economies the US and Japan.

"Low underlying growth and fiscal and financial linkages may well feed back on each other, and this is where the risks are," he said. Europe's debt crisis dragged the Australian sharemarket 1 per cent lower yesterday, with the S&P/ASX200 closing at 4040.2 points.

A decision by ratings agency Standard & Poor's to downgrade Italy's credit rating on Monday night led to a fresh wave of selling. The market has now been trading below 4200 points for almost three weeks.

The IMF has modelled what would happen if financial turmoil pushed European banks into loss, while US growth slowed and Asian banks suffered real estate losses. It said the advanced world would fall back into recession, while Asian growth would fall by three percentage points and commodity prices would plunge. The fund said its economic research showed the share price falls, such as those suffered in the past three months, were often followed by recession.

The fund's economic forecasts, which assumed the advanced economies kept their debts under control, showed they would achieve growth of less than 2 per cent both this year and next, while world growth had been trimmed from an average of 4.4 per cent this year and next to 4 per cent.

It expected the Asian economies would still achieve growth in excess of 8 per cent, with China growing 9.5 per cent this year and 9 per cent next. Asian economies continued to face risks of inflation, with both their interest and exchange rates held too low.

Coalition Treasury spokesman Joe Hockey told a meeting of coalition members yesterday that Australia was more exposed to a European crisis than most other countries, because it was a "net importer of money".

Mr Swan will attend the meeting of G20 finance ministers in Washington on Friday and the IMF meeting on Saturday.

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