September 26, 2020

I.M.F. Forecasts Modest Global Economic Growth

The fund cautioned, however, that growth was not expected to snap back to precrisis levels in the coming years. Over all, the fund expects global growth of 3.5 percent in 2013 and 4.1 percent in 2014, up from 3.2 percent in 2012. In the years just before the global downturn, annual economic growth was 4.5 to 5.5 percent.

“If crisis risks do not materialize and financial conditions continue to improve, global growth could be stronger than projected,” the Washington-based fund said in its economic report. “However, downside risks remain significant, including renewed setbacks in the euro area and risks of excessive near-term fiscal consolidation in the United States. Policy action must urgently address these risks.”

The fund issued a routine update to the projections it makes in its twice-yearly World Economic Outlook report. This time, it whittled down many of the forecasts for 2013 that it had made in October, knocking 0.1 percentage point from its United States growth forecast, 0.3 percentage point from the euro area and 0.4 percentage point from the newly industrialized Asian economies, like Singapore and South Korea.

Still, the International Monetary Fund noted that financial stresses and the risk of a major policy shock in Europe and the United States had decreased. “Optimism is in the air,” said Olivier Blanchard, the fund’s chief economist, at a news conference. “Some cautious optimism may indeed be justified,” he added. “We may have avoided the cliffs, but we still face high mountains.”

The fund said it downgraded its estimate of European growth from October despite “progress in national adjustment and a strengthened European Union-wide policy response to the euro area crisis.” It said that there might be “delays” as lower sovereign bond yields and reduced financial stress eventually translated into improved private sector borrowing conditions. It added that uncertainty about the ultimate resolution of the long-simmering European debt crisis remained high.

Mr. Blanchard said that policy challenges “clearly” remained highest in certain European countries struggling with large debt burdens and slow-growing economies. He said business competitiveness and exports had improved recently, but high interest rates, pressure for budget cuts and uncertainty continued to depress growth.

Slow growth in advanced economies, including the United States, Germany and Japan, will continue to weigh on growth in emerging economies, the fund said.

Mr. Blanchard noted that financial markets had become considerably more sanguine over the last year. The European Central Bank started a major new bond-buying program and the United States avoided the worst of the so-called fiscal cliff package of tax increases and budget cuts. He said that could be a sign that the financial markets were experiencing some kind of “bubble” but also said that investors could be “seeing things which are truly good.” Ultimately, with less financial stress, the real economy should pick up, thus explaining the market optimism, he said.

In terms of policy advice, Mr. Blanchard said that his “main message” would be that “financial market optimism should not lead to policy complacency.”

For Washington, the “priority is to avoid excessive fiscal consolidation in the short term, promptly raise the debt ceiling and agree on a credible medium-term consolidation plan,” the fund’s economists said. Christine Lagarde, the fund’s managing director, and other officials have repeatedly warned politicians in Washington not to embark on too stringent an austerity program, for the good of the world economy as well as the United States.

At the news conference, Thomas Helbling of the fund’s research division said that the United States faced a “long-term” fiscal problem, with much of the policy challenge resting in bringing down health care spending over time. He said that the challenge seemed “doable.”

This month, the fund’s sister institution, the World Bank, released a rosier economic analysis. It foresees global growth of just 2.4 percent in 2013. But it said that emerging economies could worry less about downside risks from advanced economies and start focusing on domestic economic issues, like labor market or regulatory reforms.

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Economix Blog: Laura D’Andrea Tyson: Some Good Economic News, but Will It Last?


Laura D’Andrea Tyson is a professor at the Haas School of Business at the University of California, Berkeley, and served as chairwoman of the Council of Economic Advisers under President Clinton.

In recent weeks, a series of encouraging reports on the United States economy, culminating in the December employment report, has provided tantalizing evidence that the recovery is strengthening. But it’s too early to celebrate.

Today’s Economist

Perspectives from expert contributors.

Both 2010 and 2011 started with good economic news and forecasts of a strong growth rebound but proved to be disappointing. Despite recent signs of strength, most forecasts for 2012 predict that growth will fall short of 2.5 percent, the rate required to absorb anticipated increments to the labor force, and that’s assuming Congress extends the payroll tax cut and unemployment benefits through the year.

Right now, it looks as though the United States economy will continue to recover at a moderate pace in 2012. But there are considerable downside risks that could cause growth to falter.

The central problem remains inadequate aggregate demand – both at home and around the world. The shortfall in demand is reflected in unutilized resources, notably unemployed and underemployed workers and idle plant and machinery.

The level of output in the United States is now higher than it was in the fourth quarter of 2007 but still far below the level that could be produced if existing resources were fully utilized. A recent Treasury estimate puts the gap between actual and potential output at more than 7 percent – or more than $1 trillion of goods and services.

The output gaps are even larger in many European economies, some of which never regained their 2007 output levels and have fallen into another recession that is now spreading throughout Europe.

In the United States, high levels of unemployment, weak wage gains and a steep decline in home values continue to constrain consumption, which accounts for about 70 percent of aggregate demand. Real disposable personal income actually decreased in the second and third quarters of 2011 and was essentially unchanged for the year.

The uptick in consumer spending in the last months of 2011 was offset by a worrying drop in the household saving rate, which fell to 3.5 percent, down from an average of 5.3 percent in 2010 and less than half its long-term historical average of 8 percent.

A sustained increase in household saving is necessary to make a significant and permanent dent in household debt, which still hovers at near-record levels relative to household incomes.

But instead of saving more, households borrowed more at the end of 2011, and consumer debt registered its largest increase in percentage terms since October 2001. This trend is neither healthy nor sustainable.

The December employment report showed promising signs of growth in labor incomes fueled by an increase in hours worked and an increase in hourly wages. With hours and wages both up, average weekly earnings rose at an annual rate of 3.1 percent in the last three months of 2011.

But with an unemployment rate of 8.5 percent, a labor-force participation rate of only 64 percent and 6.6 million fewer jobs than in December 2007, aggregate labor income has fallen to a historic low of 44 percent of national income. And labor income is the most important component of household income, which, in turn, is the major driver of consumer spending.

Labor’s share of national income tends to rise in recessions as companies hold on to workers, but the 2008 recession was different; companies shed workers at a terrifying pace and labor income plummeted. At the current pace of job creation, the labor share of income is not likely to recover its pre-recession level for a long time.

According to the Hamilton Project, the United States still has a “jobs gap” of 12.1 million jobs, and even with monthly job growth at the December 2011 rate of 200,000 jobs a month, the gap will not close until 2024.

Corporate profits are at an historic high as a share of national income, and business investment in plants and equipment has been strong, fueled in large measure by robust demand in emerging economies. But growth in these economies is also poised to slow in 2012 as recession in Europe and lower commodity prices eat into their exports.

In addition, emerging economies face tighter credit conditions, as European banks scale back their cross-border loans and build their capital, and as global investors reduce their risk exposure in response to the sovereign debt crisis gripping the euro zone.

With weaker consumption growth at home, the United States must rebalance future growth toward more exports. President Obama has set an achievable goal of doubling American exports over five years.

But recession in Europe and a slowdown in emerging economies will dampen American export markets in 2012. If concerns over the European debt crisis lead to a stronger dollar, as seems likely, that too will make the rebalancing and export goals more elusive.

And with a worldwide shortage of aggregate demand, there will be a strong temptation for countries to adopt zero-sum protectionist policies in 2012 to keep demand at home and to block access to their markets.

Barriers to market access are already a source of trade friction between the United States and China, which is the second-largest American export market. President Obama just announced an interagency task force to monitor “unfair” trading and business practices by China, and the United States is already investigating or pursuing market-access complaints against China on a variety of products in the World Trade Organization.

Given the large and persistent jobs deficit and the considerable risks to a sustained recovery in 2012, additional fiscal measures to increase aggregate demand are warranted – but Tea-Party obstructionism and election-year politics make them highly unlikely.

President Obama proposed a $450 billion package of such measures in October, but the package died in Congress despite compelling evidence that it would have supported about two million jobs over two years.

At this point, it is not even certain that the payroll tax cut and unemployment benefits will be extended through the rest of this year. What is certain is that we will hear a lot about job creation from Republican Congressional and presidential candidates but will see little action by a Congress mired in gridlock.

The danger in 2012 is not too much fiscal stimulus, but too much fiscal austerity. The same danger is stalking Europe and could lead to a sovereign default by a euro-zone country and the breakup of the euro.

Such an event, considered unthinkable just a few months ago but viewed as a real risk now, would plunge Europe and the United States into recession, with negative reverberations throughout the global economy.

For all of these reasons, 2012 is likely to be another difficult and disappointing year for the United States economy. The recent news has been promising but it’s too early to bring out the Champagne.

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Global Stocks Tumble After Grim Forecast by the Fed

“Today, we really seem to be stuck in a negative spiral,” said Matthias Jasper, head of equities at WGZ Bank in Düsseldorf. “Investors just want to keep their exposure low and watch from the sidelines.”

In the opening minutes of Wall Street trading, the Dow Jones industrial average was down 301.06, or 2.7 percent, 10.823.78. The Standard Poor’s 500-stock index lost 2.6 percent, and the Nasdaq composite was down 2.7 percent.

In afternoon trading Thursday in Europe, the benchmark Euro Stoxx 50 index, the FTSE 100 in London and the CAC-40 in Paris were all down between 4 and 5 percent.

As well as fears about the economic outlook on both sides of the Atlantic, investors have been unnerved by the failure of policy makers in the 17-nation euro zone to resolve the region’s debt crisis.

On Wednesday, the Fed said a complete economic recovery was still years away, adding that the United States economy has “significant downside risks to the economic outlook, including strains in global financial markets.”

It also said it would buy long-term Treasury bonds and sell short-term bonds to help stimulate lending and growth.

Meanwhile, a closely watched economic report from the euro zone — the composite purchasing managers’ index — fell to 49.2 in September from 50.7 in August, according to Markit, a financial data provider. The reading, released Thursday, was below the consensus forecast of 49.8. Both the manufacturing and services indexes declined.

“The initial and follow-up reaction from the equity market is likely the realization that the Fed has little left to offer, that Washington is a mess, and their only hope is to “ride it out” over a long period of time,” said Kevin H. Giddis, the executive managing director and president for fixed-income capital markets at Morgan Keegan Company.

“This is about to get ugly and there is very little anyone can do about it,” he added in a research note.

Stocks had fallen in the United States 2 percent or more on Wednesday after the Federal Reserve announcement.

On Thursday, the yield on 10-year United States Treasury securities hit a new low of 1.76 percent in London. After the markets opened in the United States, the benchmark bond yield was 1.77 percent.

Commodities fell. Comex gold futures were down nearly 4 percent at about $1,737 just before Wall Street opened, while crude oil futures traded in New York were down more than 6 percent at $80.57 a barrel.

The Fed pointed to a number of long-term problems in the American economy, including high unemployment and a depressed housing market. In addition Moody’s Investors Service downgraded ratings on three big American banks — Bank of America, Wells Fargo and Citigroup — saying government support had become less likely in the event of financial trouble.

The Fed’s statement “continued to suggest that the Fed funds rate will remain on hold until at least mid-2013,” said Rob Carnell, an analyst at ING in London. He added that quantitative easing could be introduced as early as November.

Analysts said the fall in the euro-area index reflected a combination of slowing global growth, significant belt-tightening in the euro area and growing concern about the escalating sovereign debt crisis.

“Whether or not the economy dips into another recession largely depends on whether governments move to contain the crisis,” said Nick Kounis, head of research at ABN AMRO in Amsterdam. “These surveys suggest that the window of opportunity is closing fast.”

“Clearly the risks of recession are elevated,” he added.

The weak economic backdrop appeared to give added importance to a series of meetings in Washington in coming days at the International Monetary Fund and World Bank.

Mr. Jasper of WGZ Bank said the gloomy economic backdrop belied the fact that many companies in Europe are in fact in a positive position in terms of their order books, profit margins and cash positions.

“We’re in a politics-driven market, and it’s hard to see light at the end of the tunnel until we have a workable solution for Greece and stabilization of the situation in Italy and Spain,” he said

In Europe there was still uncertainty about the fiscal outlook for Greece and Italy.

Christine Hauser, Niki Kitsantonis, Elisabetta Povoledo, Kevin Drew, Robert Pear and Jennifer Steinhauer contributed reporting.

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Market Rally in U.S. and Asia Starts to Falter in Europe

The Euro Stoxx 50 index of euro zone blue chips opened higher but was down 0.4 percent by mid-morning, while the FTSE 100 index in London was up 0.2 percent. BNP Paribas, the French bank, fell 3.3 percent, dragging on the European market. Trading in U.S. equity index futures suggested Wall Street stocks would open modestly lower, hardly surprising considering the 4.7 percent rise in the Standard Poor’s 500 index Tuesday, which came a day after the market bombed.

The Fed’s pledge to hold short-term interest rates near zero for at least two more years to support the faltering U.S. economy “has helped to stabilize sentiment in equities and other risky asset markets — at least for now,” analysts at Standard Chartered wrote in a research commentary.

But, they added, “The heavy emphasis on downside risks to growth suggests the pendulum of investor sentiment can quickly rotate back to a more risk-averse stance in coming days.”

Stress indicators suggested that the turmoil would continue.

President Nicolas Sarkozy of France returned from vacation on the French Riviera to meet with officials, including his finance minister and the governor of the Bank of France, on what his office called ‘the economic and financial situation.”

Mr. Sarkozy and other European politicians have come under criticism for vacationing at a time of crisis.

Gold, seen by many investors as a safe haven, continues to trade near record levels, while the dollar remains near its lows against both the Swiss franc and the yen. Indeed, the Swiss National Bank on Wednesday announced new measures to weaken the franc, while Japanese officials said they were prepared to intervene in the currency market to weaken the yen.

Worried investors were looking ahead to a conference call later Wednesday with the Bank of America chief executive, Brian Moynihan. Bank of America has been under pressure, with its share price falling 43 percent so far this year. Mr. Moynihan is expected to discuss his plans for bringing the largest American lender back onto an even keel.

On the heels of the rally Tuesday on Wall Street, Asian shares were stronger across the board. The Tokyo benchmark Nikkei 225 stock average rose 1.2 percent. The main Sydney market index, the SP/ASX 200, gained 2.6 percent. In Hong Kong, the Hang Seng index rose 2.5 percent, and in Shanghai the composite index added 0.9 percent.

The Fed was hoping that its announcement, to which three members of the Federal Open Market Committee dissented, will encourage investment and risk-taking by convincing the markets that the cost of borrowing will not rise until at least mid-2013. Still, it suggests the U.S. monetary authorities are now adopting the same policy pursued by the Bank of Japan over the last decade with marginal effect.

Masaaki Shirakawa the Bank of Japan governor, told Parliament on Wednesday: “The Fed’s latest commitment is close to what we already have in place,” Reuters reported.

The Fed announcement led analysts to revise their outlook for the European Central Bank’s rate policy, as well.

Jörg Krämer, chief economist at Commerzbank in Frankfurt, said he now believed that instead of raising rates again in 2011 the E.C.B. would leave its main interest rate target pegged to 1.5 percent until the middle of next year.

“Thereafter, the E.C.B. would resume the rate normalization process only if the sovereign debt crisis de-escalated,” he added.

U.S. crude oil futures for September delivery rose 3.7 percent to $82.22 a barrel. Comex December gold futures for rose 1.2 percent to $1,764.30 an ounce.

The dollar was mixed against other major currencies. The euro ticked up to $1.4378 from $1.4376 late Tuesday in New York, while the British pound fell to $1.6260 from $1.6316. The dollar fell to 76.67 yen from 76.96 yen — not far from its all-time low of 76.25 yen, set in March — and to 0.7233 Swiss francs from 0.7209 francs.

The Swiss currency fell after the central bank said in a statement that it was “keeping a close watch on developments on the foreign exchange market and on financial markets,” and “if necessary, it will take further measures against the strength of the Swiss franc.” The central bank said it would use an increase in bank overdrafts and currency swaps to “significantly increase the supply of liquidity to the Swiss franc money market.”

Bond prices were mostly higher, with the yield on the benchmark U.S. 10-year Treasury note slipping 2 basis points to 2.23 percent. German 10-year bonds, considered the safest in Europe, traded 7 basis points lower to yield 2.3 percent.

The bonds of Italy and Spain, which have been in the spotlight since the European Central Bank intervened in the secondary market to support Rome and Madrid as they battle to restore market confidence in their finances, were also slightly higher. The Italian 10-year fell 6 basis points to yield 5.09 percent, while its Spanish counterpart fell 6 basis points to yield 4.97 percent.

Analysts at LGT Capital Management commented in a note on Wednesday that policy makers should be able to stabilize the market in the United States, “given that the economy is not in recession and many companies remain financially strong and profitable.”

But they added that it remained to be seen whether the new measures would produce a lasting effect.

“We believe that uncertainties about the economy and the debt issues are likely to persist for a while, and exert pressure on markets again in the near future,” they wrote.

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