IMF revises forecasts much lower

IMF continues to revise its growth forecasts lower (Though Niranjan pointed this was coming much earlier). In its recent outlook , it has forecasted global growth at just 0.50% lower than 2.5% forecasted in November outlook.

IMF has released 3 reports: World Economic Outlook, Global Financial Stability Report Update and a report on deflation.

  • WEO shows skies are expected to fall – growth (advanced economies at -2.0% in 2009, all in negative in 2009. I would still think IMF is too optimistic for 2010), inflation (0.3% and 0.8% average in developed in 2009 and 2010), trade (decline of 2.8% in 2009). What is worse is that forecasts have been revised sharply compared to previous report on November 2008. Both advanced and developing are expected to shave off 3% of their growth in 2009 from 2008. India expected to grow at 5.1% in 2009 and 6.5% in 2010 compared to 6.3% and 6.8% forecasted in Nov-08.
  • GFSR is also highly bearish and one does not see any signs of improvement in financial markets. The banks in developed economies have stunning exposure to emerging econs (Figure 7) and latter are just slipping. This could make crisis worse.  IMF has increased Us originated distressed asset  from USD 1.4 trillion to 2.2 trillion. This is just a US figure. We don’t have a clue to how much the other economies’ figures are.
  • Deflation paper is a lot longer and is really interesting. It is a revised version of its 2003 paper and as I said it is the third time in 10 years we are seeing deflation risks. The paper says unless we get financial sector right, deflation would intensify. It also updates the deflation index used in 2003 paper and says:

Looking at individual countries, 13 display “moderate” risk of deflation based on 2009 projections, among them Germany, Italy, and France (Table 3). The United States is on the border to high risk. Only Japan exhibits clearly high risk, according to the indicator. However, risks of a debt-deflation spiral in Japan are lower than 10 years ago, owing to improved balance sheets of the banks and the nonfinancial corporate sector.An important caveat to this analysis is that the deflation indicator may underestimate the risks today relative to those for earlier episodes, as it does not consider house prices.

I like the caveat bit as it could easily push US, UK into high risk zone. With no respite in their housing markets and crucial linkage to financial markets, the risks could easily increase once we factor housing prices. Though it says, non fin sector of Japan looks in better shape, this report provides contrary evidence.

The paper pushes for fiscal policies  and communication polices to address deflation risks. It says mon pol can help but fiscal polices would be needed.


IMF  has released transcript of the discussion between IMF economists and media over the recent WEO and GFSR Updates.

 QUESTION: Mr. Caruana, I’m not sure I understand the $2.2 trillion. When you say here that potential deterioration in U.S.-originated credit assets, that presumably means just bad loans here in the United States. If so, what percentage of those are in real estate and what about the losses in Europe on real estate and also what’s the breakdown in terms of what percentage of United States-based banks hold those bad loans and European?

Read the answer (there is none actually). Oliver Blanchard, chief Economist of IMF says to a question:

I think the dimension in which there has been the least progress is in putting a price on the troubled assets, and I would say that nearly no matter what price you put will be an improvement in terms of reducing the uncertainty associated with balance sheets. This is really, I think, of the four margins that Jaime has mentioned, the one where I think the most urgent progress is needed.

All this suggests we just don;t know how deep the problem is. With both economic recovery and deflation depending on recovery in financial markets, it is recovery in financial markets which looks far away. It all depends on hope really.


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