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MAKING A POINT By JAGDEV SINGH SIDHU
IT'S easy to picture the worst when the news around us is not savoury at all.The platter for such troubles will include the second-quarter slowdown induced by the earthquake and tsunami in Japan. Output around the world has been shaken by the ramifications of the supply shock from Japan.
Then there is the report card on the US Federal Reserve's second round of quantitative easing (QE2). For many, QE2 really did not help the foundation of the economy. Unemployment is still sticky and there is still weakness in the housing sector but the stock market and commodities boomed with cheap liquidity flooding the market.
Inflation jumped as raw material prices surged and that, in effect, robbed a lot of people of purchasing power.
Looking at Greece, one has to assume a default is a certainty and is just a question of time. In fact, the CEO of Pimco, the world's largest bond fund, expects that to happen and many, too, agree looking at the economic structure of Greece.
Despite the gloom, the prognosis for the global economy really has not changed much.
The International Monetary Fund (IMF) expects the world economy to grow by 4.3% for 2011, which is 0.1% lower than previously estimated.
It has cut its growth forecast for the United States to 2.5% in 2011 from an earlier estimate of 2.8% in April.
IMF's Olivier Blanchard, who is its economic counsellor and the director of the research department, said predicting the economic direction for the US was too early but felt the slowdown of the US economy was more of a bump on the road than something worse.
“But assuming that oil prices are going to stay roughly stable, which is what the markets seem to predict at this point, we think that spending by consumers and firms should remain steady in what is, however, very clearly a very weak recovery. This has been a longstanding forecast of ours. The recovery in the US is a very weak one,” said Blanchard last week.
The outlook for Japan saw the biggest change as the earthquake and tsunami are expected to see that economy contracting by 0.7% this year from an earlier forecast of a 1.4% growth made in April.
The IMF has stuck to its projections for the two most populous countries, estimating growth for China and India to register 9.6% and 8.2% respectively this year. Those estimates were unchanged from April.
With troubles in Greece hogging international financial news and people wondering about the repercussions of a default by Greece on financial institutions in Europe and the US, the IMF said the risk of contagion was real and could derail European recovery and even that of the world but thought advanced economies, in which Europe features prominently, was forecast to grow at 2.2% for 2011, down 0.2 percentage points from earlier thought.
Its forecast for emerging and developing economies is 6.6% for 2011, which is up 0.1 percentage points since April.
While forecasts are relatively flat, the IMF did say risks were visible and highlighted the debt issue not only in Europe to be one of the hazard points for the global economy.
It feels debt-consolidation plans, even in the US, needs to be in place for the medium term to avoid higher borrowing costs and slower economic growth in the future.
In Asia, asset and price inflation are seen as the key risks and it feels countries with large current account surpluses should allow their currencies to appreciate.
“All countries must choose the right combination of instruments at their disposal fiscal, monetary, macro prudential to slow their economies in time and avoid costly boom-bust cycles,” said Blanchard.
Whether the bad news translates to most people's economic nightmare is something most businesses and investors are keeping an eye out for. It would appear that, for now at least, prospects and risks are balanced.
Deputy news editor Jagdev Singh Sidhu has filled nearly every large container at home with water to prepare for a dry couple of days but water is still flowing strongly from the main pipe.
