IMF warning - the world remains a dangerous place

By Business editor Peter Ryan

The latest global outlook from the IMF is the usual weighty document - this time around 100 pages - but you don't need to read beyond the executive summary to get the message that the world remains a dangerous place.

Within the first few paragraphs, the IMF says the global economy has "deteriorated", growth  projections have been "marked down" and that risk factors have become "more elevated".

And there's a more disturbing line, signalling that even the IMF can't be sure even a medium term recovery is in sight:

"A key issue is whether the global economy is just hitting another bout of turbulence in what was always expected to be a slow and bumpy recovery or whether the current slowdown has a more lasting component."

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As a result, the IMF now expects the global economy to grow 3.3 percent this year - down from an earlier prediction of 3.5 percent.

The IMF says next year's forecast is "sluggish" - it puts the risk of a serious global slowdown as "alarmingly high" and warns confidence is "exceptionally fragile."

The IMF's chief economist Olivier Blanchard says emerging Asia, including China, is caught in an spillover - caused in large part by the deepening debt crisis in Europe.

"Because the world now is so interconnected, what happens in one part of the world has an effect on the rest of the world and so all these things are combining to slow down growth, " Mr Blanchard said in Tokyo.

"To avoid a sharp downturn, it's very clear what's needed is that policymakers take the right decisions. So if you look at Europe, the eurozone now has put in place, in principle, an architecture which is very coherent, the problem is implementation and they really have to implement it, that's the key."

The other risk for the world, according to the IMF, is what's known as the "fiscal cliff" in the United States.

Olivier Blanchard has called on Republicans and Democrats to agree on ending the congressional gridlock over planned tax increases and steep spending cuts that could trigger a double dip recession.

"In the US we're getting closer to this thing called a fiscal cliff, which would be a catastrophe if it happened that quickly. So here it's clear that there has to be put in place a fiscal plan, not only for this year but for coming years, which is credible," Mr Blanchard said.

Matt Sherwood, head of investment research at fund manager Perpetual, has been predicting the global slowdown, but even he's surprised at the IMF's direct language.

"Things like fragility, like damaging, and they were unusually blunt, particularly on governments and how they've consistently underestimated the damage done by raising taxes and cutting spending. So it was actually a very unlike IMF kind of statement," Mr Sherwood told The World Today.

Matt Sherwood says the IMF is also warning that the deep austerity seen in Europe could contribute to a new global recession.

"I think really what the governments were initially saying was that if we wear a bit of pain in the short term we will get economic sunshine after 12 months or so," Mr Sherwood said.

"I mean Greece was originally forecast to return to growth in 2013 and those kind of forecasts when you have something like an 8 per cent spending cut in an economy where the government is 40 of the economy, I mean those sort of forecasts are quite farcical, and I think the IMF's come out pretty hard against governments for consistently underestimating what they're actually doing to the economic growth profile.

"As a result it's actually given quite a bit of ammunition to critics of austerity, particularly in Europe."
Australia's growth is only expected to slow marginally, much less than other developed nations, being still supported by the resources sector.

But Matt Sherwood says the Treasurer Wayne Swan shouldn't be complacent especially about achieving a budget surplus.

"We suspect that they're going to miss the surplus by around $10 billion this financial year and as a result, if they want to achieve it under the current environment they'll need to find more spending cuts," Mr Sherwood said.

"The problem of course is the economy is already slowing, so if you do more spending cuts and you raise more tax revenue, that slows the economy even further.

"And so we think it might be a good idea for the Government just to abandon this idea of a fiscal surplus for financial year 2013 and just achieve you know a modest deficit."

A closely watched factor will be Australia's jobless rate, which could tick up to 5.3 per cent when the ABS releases the official reading on Thursday.

Twitter: @peter_f_ryan