Economic Update IMF World Economic Outlook Update

The IMF has released its latest World Economic Outlook. The Outlook contains significant upgrades to global growth forecasts. Global GDP growth of close to or above 4% is expected in both 2010 and 2011, with the global recovery " off to a stronger start than anticipated earlier" . But in many parts of the global economy the recovery is not self sustaining. The global rebound was being driven by the extraordinary amount of policy stimulus. In highlighting the reliance on policy drip feed the IMF noted that in the advanced economies there were still "few indications that autonomous (not-policy-induced) private demand is taking hold". A turnaround in the inventory cycle and the effects of stimulus are the key near-term drivers of activity across many advanced economies. It is in these regions that growth prospects remain the weakest, and where the risks to growth are heavily concentrated. The IMF expects the recovery in the major advanced economies to be weak by historical standards and for output to remain below its pre-crisis level until late 2011. "High unemployment rates and public debt, as well as not-fully-healed financial systems, and in some countries, weak household balance sheets are presenting further challenges to the recovery" . Emerging and developing economies are expected to drive the global expansion in 2010 and 2011. Growth in this cohort of economies is expected to return to 2008 levels in 2010 and accelerate further in 2011. The stronger performing economies in 2010 should be Australia's Asian trading partners. It is also an environment favourable to commodity prices. China's GDP growth is expected to accelerate to 10% in 2010. Significant upgrades were made to growth in the other BRIC economies (Brazil, Russia and India) as well. Along with improved Chinese and Asian regional demand was the IMF's view that a small degree of further increases in commodity prices was likely. While the two camps in the global economy appear clear the IMF noted that there were divergences within groups, reflecting different initial conditions, external shocks and policy responses. The Australian context is a clear example in this regard. The IMF expects Australia's GDP growth to accelerate to 2.5% in 2010 and 3.0% in 2011. By comparison, this outlook is slightly weaker than the mean forecast from the most recent survey of private sector economists by Consensus Economics had Australian GDP growth at 2.9% in 2010 and 3.2% in 2011 (CBA(f) 3.0% in 2010 & 2011). Risks remain, though they are significantly skewed towards the challenges for the major advanced economies. The three key downside risks the IMF highlighted were: • the possibility of a premature and incoherent exit from supportive policies; • the potential for impaired financial systems, housing markets and high unemployment to hold back the recovery in household spending more than anticipated; and • rising concerns about perilous budget positions and fiscal sustainability which could impair recoveries by raising the cost of borrowing for households and companies download