IMF Update: The Recovery Continues (We Hope…)

The International Monetary Fund (IMF) is out with its first update on the global economy this year. Reading through the report, it seems like the IMF is trying to convince, primary themselves, that an economic recovery is just around the corner. The cold facts, however, don’t give any conclusive answer – the charts looks more like a flat-line on an EKG monitor.

“Financial stresses, however, are expected to remain elevated in the periphery of the euro area, where market participants are still concerned about sovereign and banking risk, the political feasibility of current and envisioned austerity measures, and the lack of a comprehensive solution.”

International Monetary Fund


Well, I don’t think anyone can blame the IMF for being uncertain about the world economic outlook. Most experts, including the US Federal Reserve, is. In its latest update, the IMF points to the fact that it is substantial differences in the economic conditions from region to region, and from nation to nation. The main message, however, seems to that the downside risks has increased since the last report in October 2010.

The report “World Economic Outlook Update – January 2011” was released at 3 AM (EDT) this morning.

At the moment it’s being dissected by economist and analysts, hunting for clues to what may be in store for them in the months to come.

I don’t think they will find much, thou. Looking at the projected development of the global economy in 2011 and 2012, it shows an almost totally flat line.

Here’s the report’s executive summary:

“The two-speed recovery continues. In advanced economies, activity has moderated less than expected, but growth remains subdued, unemployment is still high, and renewed stresses in the euro area periphery are contributing to downside risks. In many emerging economies, activity remains buoyant, inflation pressures are emerging, and there are now some signs of overheating, driven in part by strong capital inflows. Most developing countries, particularly in sub-Saharan Africa, are also growing strongly. Global output is projected to expand by 4½ percent in 2011 (Table 1 and Figure 1), an upward revision of about ¼ percentage point relative to the October 2010 World Economic Outlook (WEO). This reflects stronger-than-expected activity in the second half of 2010 as well as new policy initiatives in the United States that will boost activity this year. But downside risks to the recovery remain elevated. The most urgent requirements for robust recovery are comprehensive and rapid actions to overcome sovereign and financial troubles in the euro area and policies to redress fiscal imbalances and to repair and reform financial systems in advanced economies more generally. These need to be complemented with policies that keep overheating pressures in check and facilitate external re-balancing in key emerging economies.”

Now, let’s see:

  • “comprehensive and rapid actions”
  • “policies to redress fiscal imbalances”
  • “reform financial systems”
  • “keep overheating pressures in check”
  • “facilitate external re-balancing in key emerging economies”

I’m afraid the IMF is severely overestimating the European governments ability come up with, and agree on, common solutions.

And these recent economic indicators seems to be pointing in the wrong direction.

So, we better have a closer look at the IMF’s alternative scenario, which is pretty much the same as decried in their last report – WEO October 2010.

“The scenario—which is broadly similar to the one presented in the July 2010 WEO Update— assumes that a large shock followed by insufficiently rapid and strong policy action results in significant losses on securities and credit in the euro area periphery. This causes capital ratios to fall substantially in several countries, both in the periphery and the core.”

“Under such a scenario, European banks tighten lending conditions by a similar magnitude as during the collapse of Lehman Brothers in 2008. As a result, euro area growth is reduced by about 2½ percentage points relative to the baseline. Assuming that financial spillovers to the rest of the world are limited – with the increase in bank-lending tightness in the United States about half that in Europe – global growth in 2011 is lower by about 1 percentage point than in the baseline. But if financial contagion to the rest of the world is more severe – resulting in a spike in generalized risk aversion, a drying up of liquidity, and sharp falls in equity markets – the impact on global growth would be substantially larger, amplified by balance sheet weaknesses in other major advanced economies.”

Another Lehman-shock, hu?

Personally, I would not be surprised. Even the IMF has figured out that the financial sector is still in deep trouble, in spite of what the big-bank CEO’s might say.

“The risk of financial turmoil spreading from the periphery to the core of Europe is a by-product of continuing weakness among financial institutions in many of the region’s advanced economies, and a lack of transparency about their exposures. As a result, financial institutions and sovereigns are closely linked, with spillovers between the two sectors occurring in both directions. Although the periphery accounts for only a small portion of the euro area’s overall output and trade, substantial financial linkages with countries in the core, as well as financial spillovers through higher risk aversion and lower equity prices, could generate a slowdown in growth and demand that would hinder the global recovery. In particular, continued market pressures could result in serious funding pressures for major banks and sovereigns, increasing the likelihood that problems spill over to core countries. Figure 4 presents an alternative scenario that illustrates how larger spillovers can subtract from growth.”

Jepp, we can see that….the banks will – under IMF’s alternative scenario – completely stop lending money.

Hey, Ben! May we have another QE, please?

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Here’s a copy of the report.

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