One-in-Six Chance of a Deep World Recession

The International Monetary Fund says there is now a one-in-six chance of a deep world recession next year.

The warning, in the IMF’s major World Economic Outlook report, comes as the organisation again cuts its forecasts for global growth in 2012 and 2013.

Growth this year is now expected to be 3.3 per cent – 0.2 percentage points less than was forecast in July. Growth in 2013 is forecast at 3.6 per cent, or 0.3 percentage points below the July forecast.
These forecasts show the world economy labouring just above the 3 per cent growth level regarded by the IMF as a world recession.

However, the IMF estimates there is a 17 per cent probability of global growth falling to less than 2 per cent in 2013. That, it says, compares with a probability of only about 4 per cent in April.

A fall in the global growth rate to less than 2 per cent would be the result of a recession in the advanced economies and a “serious slowdown” in the emerging market and developing economies.

It would be a milder recession than experienced in 2009, when the world economy is estimated to have shrunk by 0.6 per cent. But it would be one of only four years since 1979 when world growth has fallen below 2 per cent.

For Australia, which is forecast by the IMF to grow by 3.3 per cent this year and 3 per cent in 2013, the main impacts of a global recession would be a further sharp fall in iron ore, coal and other mineral prices, a decline in real national income and an increase in unemployment.

“Downside risks have increased and are considerable,” the IMF says of the global economy in the report, released on Tuesday morning at the organisation’s annual meeting in Tokyo. 
It warns that fiscal consolidation is weighing on demand “with the impact of spending cuts and tax rises amplified by large fiscal multipliers”.

At the same time, it says, the positive impact of accommodative monetary policy “may be diminishing”.

“The financial system is still not functioning efficiently ... in many countries, banks are still weak, and their positions are made worse by low growth,” the IMF’s chief economist, Olivier Blanchard, says in the forward to the report.

“As a result, many borrowers still face tight borrowing conditions.”
The IMF’s central forecast of global growth of 3-plus per cent is based on two assumptions.

The first is that Europe will adopt policies that gradually ease financial conditions further in Spain and the other periphery economies.

The second is that US politicians prevent the drastic automatic tax increases and spending cutbacks known as the “fiscal cliff” which, it says, could push the US into recession.

Major Setback for Economic Integration Plan

Europe's efforts to seal a new pact to deepen economic integration was dealt a setback even before it comes to life after Standard & Poor's (S&P) warned that the treaty may lead to self-defeating austerity.

European Union leaders agreed after a tense summit earlier to write a new pact to toughen budget discipline across the bloc, with Germany leading the charge for stricter policing of spending after years of toothless oversight.

The aim of the pact is to convince the markets that the euro zone can prevent a new crisis like the one that has forced Greece, Ireland and Portugal to take bailouts and is driving Italy and Spain to the edge.

But after downgrading the credit score of nine of the euro zone's 17 states on Friday, including stripping France and Austria of their triple-A ratings, S&P voiced doubt about the effectiveness of the pact.

The new treaty, which EU leaders hope to sign by March, "has not produced a breakthrough of sufficient size and scope to fully address the euro zone's financial problems," it said.

The pact is based "on only a partial recognition of the source of the crisis: that the current financial turmoil stems primarily from fiscal profligacy at the periphery of the euro zone," the agency said.

To S&P, the euro zone's problems "are as much a consequence of rising external imbalances and divergences in competitiveness between the euro zone's core and the so-called 'periphery'".

Negotiators this week reached an agreement in principle on the "fiscal compact," which demands that governments write into their constitutions a law requiring balanced budgets.

The pact would make sanctions against governments that violate budget rules more automatic, after most countries ignored for years EU rules limiting public deficits to three per cent of gross domestic product.

But S&P warned that "a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers' rising concerns about job security and disposable incomes, eroding national tax revenues."

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