The International Monetary Fund more optimistic than in 2012, but it fears that prolonged stagnation in the eurozone could drag the rest of the world economy down with it
The International Monetary Fund feels more upbeat about the state of the world. Not by much, but a bit cheerier than it was six months ago when it was fretting about the eurozone busting apart or the United States imposing budget cuts that would have killed economic recovery stone dead.
Those two big risks have, the Fund believes, been greatly diminished.
It thinks the US is going about fiscal consolidation too hastily and too clumsily, and wishes eurozone policymakers would get their fingers out and get on with the creation of banking and fiscal unions.
But all in all it thinks the doomsday scenarios it was envisaging last autumn are now less likely.
So, while 2013 is not going to be a vintage year, with global growth similar to that in 2012, activity will strengthen in the second half of the year and into 2014.
Even so the Fund likes to pepper its World Economic Outlook with warnings about what could go wrong, and the spring 2013 edition is no exception.
The main short-term risk, predictably enough, is seen as Europe, where the crisis in Greece, the political impasse in Italy, the court ruling against austerity measures in Portugal and the speculation about the financial difficulties facing Slovenia have punctured optimism at the turn of the year that the worst was over.
The Fund's growth forecasts for the single currency area are dire. Of the big four economies only one – Germany – is slated to see any growth at all in 2013, and even then expansion of just 0.6%, weaker even than the forecast for the UK. France is expected to follow last year's zero growth with a contraction of 0.1%; Italy and Spain are both predicted to see output slump by around 1.5% in 2013.
Prolonged stagnation in the eurozone – GDP falls by 0.3% this year after a 0.6% drop in 2012 – is worrying in itself but it also has knock-on consequences for the rest of what the Fund sees as a three-speed global economy. In the first division are the emerging economies, which are exploiting their ability to catch-up with the countries of the developed world. They should see growth of more than 5% this year, similar to last year's performance.
The second division includes the US, Canada and Japan – even though the IMF clearly believes the stop-at-nothing reflationary strategy adopted by the new government in Tokyo is "risky" given the high level of public debt and the absence of a credible plan for putting the public finances back into some sort of order.
Finally, there is Europe, firmly in division three and with no immediate prospect of promotion. Britain, according to the Fund's forecasts is battling to avoid relegation into the bottom tier. It is expected to have higher growth and lower unemployment than the eurozone, but suffer from higher inflation and a bigger current account deficit. The danger from the Fund's perspective is that the eurozone drags the rest of the world economy down with it. Growth in Asia is highly dependent on what is happening elsewhere, while a special analysis by IMF economists showed strong linkages between expansion in the US and expansion in the eurozone.
Some indications of this are already starting to feed through into the most recent economic data, which in the US, China and Europe has been weaker than anticipated. When the Fund notes in the WEO that "financial markets have led the re-acceleration in activity", this is not strictly true. There has, as yet, been no "re-acceleration in activity" merely the expectation that there will be one. The wobble in the markets in recent days reflects concern that celebrations to mark the end of the most severe global downturn since the 1930s – and even the Fund's cautious optimism – may be a trifle premature.
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