September 26, 2020

I.M.F. Lowers Estimates for Global Growth for 2013

In a periodic update to its economic projections, the fund said Tuesday that it expected global growth of about 3.3 percent this year and 4 percent in 2014. That is a reduction of 0.2 percentage point since its January estimate for 2013; it did not change its estimate for next year’s growth.

Still, the report underscored that financial conditions have improved markedly since last year, in no small part because of aggressive monetary easing undertaken by the Federal Reserve, the Bank of Japan and the European Central Bank.

Recession continues to afflict Europe, and the world still struggles with high unemployment, but risks to the downside — in particular from the threat of a country’s leaving the euro zone and from fiscal policy uncertainty in the United States — have faded.

“Global prospects have improved again but the road to recovery in the advanced economies will remain bumpy,” said the report, called the World Economic Outlook. “Policy makers cannot afford to relax their efforts.”

The report again focuses in no small part on the economic troubles emanating from Europe. The fund cut its projections of current-year growth for the euro zone economies of France, Italy and Spain, as well as for Britain, which has also carried out austerity policies and entered a period of economic contraction.

I.M.F. officials have urged stronger European economies with lower borrowing costs, like Germany, to do more to foster growth across the entire region and to move more aggressively to finish a cross-border banking union to shore up investor confidence. The fund and many international economic officials, including Treasury Secretary Jacob J. Lew, are expected to press Europe on its plans for growth again this week.

“Policy should use all prudent measures to support sluggish demand,” the report said. “However, the risks related to high sovereign debt limit the fiscal policy room to maneuver. There is no silver bullet to address all the concerns about demand and debt.”

Still, officials have proposed a broad range of policies to help bolster demand in Europe, including delaying budget cutting in stronger economies, reforming the labor markets and increasing inflation targets.

“The forecast for negative growth in the euro area reflects not only weakness in the periphery but also some weakness in the core,” Olivier Blanchard, the fund’s chief economist, wrote in the report, noting that Germany is expected to have virtually no growth in 2013 and France is expected to have a negative growth rate. He included one ominous warning: “This may call into question the ability of the core to help the periphery, if and when needed.”

On a more positive note, the I.M.F. said that equity prices had risen in a broad market rally, and volatility had fallen to precrisis levels. The spread between government bond yields for periphery and central euro zone economies has diminished as well.

Still, the fund warned that “markets may have moved ahead of the real economy” and noted that improved financial conditions had not, in many cases, translated to better access to credit for consumers and businesses, with lending standards remaining tight. In the euro area, indeed, credit continues to contract and lending conditions continue to tighten, the I.M.F. said, reflecting in part “the poor macroeconomic outlook for the region as a whole.”

The fund lowered its estimate of United States growth this year to 1.9 percent, down 0.2 percentage point from its January forecast. But it said the United States was “in the lead” in seeing an acceleration of growth, in part because Washington policy makers were able to avoid the so-called fiscal cliff of tax increases and spending cuts at the turn of the year.

The I.M.F. also said that the United States had proved too aggressive in carrying out budget cuts, given its still-sluggish rates of growth and high unemployment levels. It said it anticipated that the across-the-board $85 billion in budget cuts known as sequestration would push down growth levels this year and going forward.

“The growth figure for the United States for 2013 may not seem very high, and indeed it is insufficient to make a large dent in the still-high unemployment rate,” Mr. Blanchard said in the report. “But it will be achieved in the face of a very strong, indeed overly strong, fiscal consolidation of about 1.8 percent of G.D.P. Underlying private demand is actually strong, spurred in part by the anticipation of low policy rates under the Federal Reserve’s ‘forward guidance’ and by pent-up demand for housing and durables.”

The fund raised its estimate of growth for Japan, which has recently undertaken an aggressive round of fiscal and monetary stimulus to aid its slow-growing economy. Still, the I.M.F. anticipates an economic growth rate of only about 1.5 percent for this year and next for Japan.

Tokyo’s assertive monetary easing — which has pushed down the value of the yen, thus aiding the country’s exports — has reignited concerns about competitive devaluation, often referred to as currency wars. In the report, the fund acknowledged concerns over Japan’s policy, but called the recent bout of currency complaints “overblown.”

“There seem to be no large deviations of the major currencies from medium-term fundamentals,” it said. “The U.S. dollar and the euro appear moderately overvalued and the renminbi moderately undervalued. The evidence on valuation of the yen is mixed.”

On the whole, emerging economies are “doing well,” the fund said, though growth rates in some big developing countries — in particular China — seem to have declined somewhat from their precrisis levels. Of late, many developing countries have benefited from high commodity prices, low interest rates and money flowing in from abroad in search of returns, the fund said. In the past, such conditions have created asset bubbles, but policy makers seem vigilant about the risks, the I.M.F. added.

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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: Fiscal Contraction Hurts Growth

Today's Economist

Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.”

The United States has a large budget deficit and a ratio of debt to gross domestic product that, in most projections, continues to rise over time. Some House and Senate Republicans are arguing strongly that this situation calls for big, immediate cuts in government spending — for example, as part of any agreement to increase the federal government’s debt ceiling.

The Joint Economic Committee of Congress held a hearing on Tuesday to discuss whether such spending cuts would be contractionary or expansionary for the economy in the short run. After taking part as a witness at the hearing, I conclude that large immediate spending cuts would tend to slow the economy.

The general presumption is that fiscal contraction — cutting spending or raising taxes, or both — will immediately slow the economy relative to the growth it would have had otherwise. (Of course, some lawmakers and candidates call for cutting spending and cutting taxes, too. This would not lower the deficit, and, most likely, in the short term it would also lower growth, because the spending cuts will be more contractionary than the tax cuts are expansionary, in part for the reasons discussed below.)

But some studies have found that in particular instances, fiscal contractions — meaning deficit-reduction measures — have been consistent with no deceleration of economic growth. The International Monetary Fund produced the most balanced recent assessment of the available evidence in Chapter 3 of its October 2010 World Economic Outlook, “Will It Hurt? Macroeconomic Effects of Fiscal Consolidation.” (I was chief economist at the I.M.F. but left in August 2008 and had nothing to do with this study.)

Under four conditions, fiscal contractions can be expansionary. But none of these conditions is likely to apply in the United States today.

First, if there is high perceived sovereign default risk, fiscal contraction can potentially lower long-term interest rates. But the United States is currently among the countries with the lowest perceived risk — hence the widespread use of the dollar as a reserve asset.

To the extent there is pressure on long-term interest rates in the United States today because of fiscal concerns, these are mostly about the longer-term issues involving health care spending; if this spending were to be credibly constrained (e.g., in plausible projections for 2030 or 2050), long rates should fall.

In contrast, cutting discretionary spending, which is a relatively small part of the federal budget, would have little impact on the market assessment of our longer-term fiscal stability.

Second, it is highly unlikely that short-term spending cuts would directly increase confidence among households or companies, particularly with employment still around 5 percent below its precrisis level. The United States still has a significant “output gap” between actual and potential G.D.P., so unemployment is significantly above the achievable rate. Fiscal contractions rarely inspire confidence in such a situation.

Third, if monetary policy becomes more expansionary while fiscal policy contracts, this can offset to some degree the negative short-run effects of spending cuts on the economy. But in the United States today, short-term interest rates are as low as they can be and the Federal Reserve has already engaged in a substantial amount of “quantitative easing” to bring down interest rates on longer-term debt.

It is unclear that much more monetary policy expansion would be advisable, or possible, in the view of the Fed, even if unemployment increases again — as it might if fiscal contraction involves laying off government workers.

Fourth, tighter fiscal policy and easier monetary policy can, in small, open economies with flexible exchange rates, push down (that is, depreciate) the relative value of the currency — thus increasing exports and making it easier for domestic producers to compete against imports. But this is unlikely to happen in the United States, in part because other industrialized countries are also undertaking fiscal policy contraction.

Also, the pre-eminent reserve currency status of the dollar means that it rises and falls in response to world events outside our control — and at present political and economic instabilities elsewhere seem likely to keep the dollar relatively strong.

The available evidence, including international experience, suggests it is very unlikely that the United States could experience an “expansionary fiscal contraction” as a result of short-term cuts in discretionary domestic federal government spending.

The best way to bring the debt-to-G.D.P. ratio under control is to limit future spending increases and augment revenue while the economy continues to recover. In particular, health care spending needs to be credibly constrained but doing this properly would mean limiting health care costs as a percentage of G.D.P. — proposals that just push costs from government onto companies and individuals are not appealing.

There is also a pressing need for tax reform — to reduce complexity, lower distortions and, in particular, roll back the subsidies for household and corporate debt that have crept into the system. Excessive private sector debts pose a significant systemic and fiscal risk to the economy. The major reason government debt surged relative to G.D.P. in the last three years is the deep recession — the result of a financial crisis brought on by the irresponsible buildup of private debt.

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