IMF Briefing Note Says Slow Growth is Certain in 2nd Half of 2010

Article first published as IMF Briefing Note Says Slow Growth is Certain in 2nd Half of 2010 on Technorati.

IMF_3 The International Monetary Fund reiterated that risks for slowdown in global growth in 2nd half of 2010 may be unavoidable and even intensified, due to recent turbulence in sovereign debt markets and prolonged weakness in the financial sector. In a briefing note prepared for Group of 20 (G20) countries’ deputy finance ministers, the IMF said though the global growth in 1st half of 2010 had been somewhat stronger than expected, it would slow in 2nd half of 2010 and 1st half of 2011.

First half of 2011 includes last quarter of present FY11 for India. This poses a danger to India’s present hawkish markets’ mood that risks India’s GDP growth for FY 2010-11 as the US developments automatically impact Asian economies as per recent comments by IMF director Dominic Strauss Khan. IMF cites crisis of confidence in some national economies coupled with the financial sector’s weakness as major reasons for the expected slowdown.

US weakness

Yesterday the WEF report said the U.S ranking slipped from 2nd position to 5th position due to decreasing businesses’ confidence in the US economy and its huge debt and deficit. The IMF said the US property market was a source of downside risk as foreclosures of mortgaged houses had been speeded up there. Increased foreclosures or number of home repossessions are further pressuring bank balance sheets.

This may be causing reduction in credit available to the economy, the IMF suggested. Risk of credit unavailability causes renewed turbulence in sovereign debt market that could adversely affect the ‘to and fro’ flow of finance between sovereigns and the financial sector. Such developments could cause Greece like crises in developed economies.

Rebalancing Emerging and Developed Economies

The IMF advocated in its briefing that the developed economies had to concentrate on increasing their exports and reduce budget deficits while emerging economies like China, Brazil and India had to shift from export growth orientation to the developing internal market demand so as to provide more room for exports from developed economies.

This had never been the suggestion from the IMF, when developed economies were flourishing and the present so called emerging economies had severely suffered with huge debts and balance of payment crisis. This clearly shows the IMF is more worried about decreasing clout of the developed economies.

Instead of asking emerging economies to look more into increasing domestic demand, it may ask the U.S. to implement spending cuts and austerity measures that were forced upon the EU countries with huge debt and fiscal deficits. Though IMF called for reducing budget deficits, it postponed the measure to the future but not immediately.

The IMF also said that if growth threatens to slow appreciably more than expected, G20 countries should resort to monetary measures first, although it acknowledged that such defenses had "become thin". Some countries with budgetary breathing room may be able to temporarily delay their consolidation or let automatic stabilizers such as unemployment benefits to kick in. The Fund predicts global output will expand 4.6 percent in 2010 and 4.3 percent in 2011, compared to a decline of 0.6 percent in 2009.

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