World economic outlook

THE INTERNATIONAL Monetary Fund (IMF) published the Bi-Annual World Economic Outlook (WEO) last week so I thought I would provide a brief summary with a focus on the Asian region and the Philippines.

The WEO projects global growth, at 3.3 and 3.6% in 2012 and 2013, respectively, weaker than in the July 2012 WEO Update. In the euro area, real GDP is projected to decline by 0.4% in 2012 led by a sharp contraction in most periphery economies, constrained by tight fiscal policies and financial conditions. With diminishing fiscal withdrawal and domestic and euro-area-wide policies supporting a further improvement in financial conditions, real GDP is projected to expand by 0.2% in 2013. The US economy has slowed and real GDP is projected to expand by 2.2% in 2012, easing to 2.1% in 2013. Weak household balance sheets and confidence, relatively tight financial conditions, and continued fiscal consolidation stand in the way of stronger growth. Low growth and uncertainty in advanced economies are affecting emerging market and developing economies, through both trade and financial channels, adding to homegrown weaknesses. Relative to our April 2012 forecasts, our projections for 2013 growth have been revised from 6.0% down to 5.6% for emerging market and developing economies.

The WEO forecast rests on two crucial policy assumptions. The first is that European policymakers — consistent with the Global Financial Stability Report (GFSR)’s baseline scenario — will adopt policies that gradually ease financial conditions further in periphery economies. In this regard, the European Central Bank (ECB) has recently done its part. It is now up to national policymakers to move and activate the European Stability Mechanism (ESM), while articulating a credible path and beginning to implement measures to achieve a banking union and greater fiscal integration. The second assumption is that US policymakers will prevent the drastic automatic tax increases and spending cutbacks (the “fiscal cliff”) implied by existing budget law, raise the US federal debt ceiling in a timely manner, and make good progress toward a comprehensive plan to restore fiscal sustainability. The WEO forecast could once again be disappointed on both accounts.

The IMF’s current outlook for Asia in the second half of 2012 is for moderating growth. In contrast to the pickup expected in the April 2012 Asia and Pacific Regional Economic Outlook (REO), the recent deterioration of a broad range of indicators (discussed in last month’s column) suggests recovery will be further delayed. Asia’s growth is now forecast to ease to 5 1/2% in 2012, about 1/2 percentage point below 2011. That said, Asia will remain the global growth leader, expanding over two percentage points faster than the world average. A modest growth pickup to about 6% in 2013 could result mostly from strengthening external demand-itself helped by the recent actions taken by leading central banks — with accommodative macroeconomic policy stances across the region also playing a role. Japan would be a major exception, as the lift from exports would be outweighed by the waning impulse from reconstruction spending.

For the Philippines, the WEO growth forecast for 2012 is unchanged at 4.8% reflecting strengthening external headwinds from the global environment despite the slightly stronger growth out-turn in the first half of the year and expected resiliency of domestic demand. The just-released export growth figures for August, showing a contraction of 9% (year-over-year), suggest that the weaker global growth has softened external demand for Philippine exports. As the global environment remains the key drag on Philippine growth, if the momentum from the first half persists and public spending accelerates towards the end of the year, growth could surprise on the upside.

Downside risks to this outlook in Asia remain considerable, although accommodative global monetary conditions also raise the possibility that growth in Asia might surprise on the upside if European and U.S. policymakers fully deliver on their commitments. The IMF staff’s fan chart for Asia’s growth — which uses financial and commodity market data and analyst forecasts to gauge risks — suggests there is now a one in seven chance of Asia’s growth falling below 4% in 2013, close to the rate last observed in 2009, the year after the Lehman shock. About two-thirds of emerging Asia’s exports (on a value-added basis) are linked to demand from Europe and the United States alone. Therefore, trade-channel effects, including through the second-round impact of lower investment and employment in export-oriented sectors, would exert a powerful downward drag on Asia including the Philippines in the event of a severe global slowdown. While relatively strong economic and policy fundamentals have helped buffer Asian economies against adverse financial market spillovers, ASEAN economies including the Philippines would also be affected as their financial markets have showed a high correlation with systemic advanced economies partly through surges in capital flows.

A hard landing in China remains a low probability, but high-impact risk for the region. China has become an important engine of growth for the region and a hard landing would have a significant impact on regional economies, albeit to a lesser extent in the Philippines. –Shanaka Jay Peiris, Businessworld

The author is the IMF Resident Representative for the Philippine The views expressed herein are those of the author and should not be attributed to the IMF, its Executive