By Peter OBIORA InvestAdvocate
Lagos (INVESTADVOCATE)-The International Monetary Fund (IMF) Monday projected that emerging market and developing economies are expected to see an increase in growth to 5.1 percent (5.1%) in 2014 and to 5.4% in 2015.
‘’Overall, growth in emerging market and developing economies is expected to increase to 5.1 percent in 2014 and to 5.4 percent in 2015,’’ an update of the key World Economic Outlook (WEO) released by the IMF said.
While it projected the global growth to be slightly higher in 2014, at around 3.7%, rising to 3.9% in 2015.
Olivier Blanchard, chief economist at the IMF in his opening remarks on the release of the WEO update said first, the recovery is strengthening. ‘’We forecast world growth to increase from 3% in 2013 to 3.7% in 2014,’’ he said.
Second, according Blanchard, the recovery was largely anticipated and the Fund has revised its forecast for world growth in 2014 by just 0.1% relative to its October forecast.
‘’The basic reason behind the stronger recovery is that the brakes to the recovery are progressively being loosened. The drag from fiscal consolidation is diminishing. The financial system is slowly healing. Uncertainty is decreasing,’’ Blanchard said.
Blanchard said the third message on the WEO update is that recovery is still weak and uneven. ‘’Among advanced economies, it is stronger in the US than in Europe, stronger in the Euro core than in Southern Europe. In most advanced economies, unemployment remains much too high and downside risks remain,’’ he said.
He affirmed that as the recovery takes hold in advanced economies, a main challenge will be to normalize monetary policy. ‘’While some of this expected normalization has already been priced in both long rates and exchange rates, we can expect complex capital movements across countries for some time to come,’’ he said.
The IMF’s chief economists said the evidence from last year is that emerging market economies with weak macro frameworks may be most affected and clear communication by advanced economies’ central banks, and stronger domestic policies in some emerging market economies, are both essential to reduce this risk.
Blanchard further affirmed that while the IMF’s baseline forecasts are for low but positive inflation in the Euro area, the risk is that inflation turns into deflation.
‘’While there is nothing magical about the number zero, the lower the inflation rate, and a fortiori the larger the deflation rate, the more dangerous it is for the Euro recovery. Deflation means higher real interest rates, higher public and private debt burdens, lower demand, lower growth, and further deflation pressure,’’ the IMF’s chief economist said.
The IMF WEO update says to avoid that risk, accommodative monetary policy remains of the essence. ‘’And so is the strengthening of banks’ balance sheets. In this respect, carrying out the balance sheet assessment and stress test process now under way may be the most important short term task facing the Euro area today,’’ the update noted.
On the other area projections, the WEO update says growth in the United States is expected to be 2.8% in 2014, up from 1.9% recorded in 2013. ‘’Following upward surprises to inventories in the second half of 2013, the pickup in 2014 will be carried by final domestic demand, supported in part by a reduction in the fiscal drag as a result of the recent budget agreement. But the latter also implies a tighter projected fiscal stance in 2015 (as the recent budget agreement implies that most of the sequester cuts will remain in place in FY2015, instead of being reversed as assumed in the October 2013 WEO), and growth is now projected at 3% for 2015 (3.4% in October 2013).
Also, the WEO update says the euroareais turning the corner from recession to
recovery and growth is projected to strengthen to 1% in 2014 and 1.4% in 2015, but the recovery will be uneven. ‘’The pickup will generally be more modest in economies under stress, despite some upward revisions including Spain. High debt, both public and private, and financial fragmentation will hold back domestic demand, while exports should further contribute to growth,’’ the WEO update affirmed.
While elsewhere in Europe, in the United Kingdom (UK) growth is expected to average 2¼% in 2014–15, but economic slack will remain high.
In Japan, growth is now expected to slow more gradually compared with October 2013 WEO projections. Annual growth is expected to remain broadly unchanged at 1.7 percent in 2014, given carryover effects, before moderating to 1% in 2015.
The IMF’s WEO update affirms that growth in China rebounded strongly in the second half of 2013, due largely to acceleration in investment and growth is expected to moderate slightly to around 7½% in 2014–15.
Finally, the INF says recovery is indeed strengthening, but much work remains to be done.
