IMF's growth estimate for emerging markets revised down by 1% to 5.1%
10 Nov 08
Kevin Lings, chief economist at Stanlib reports that last week the International
Monetary Fund revised down their world GDP growth estimate for 2009 by a very
significant 0.8 percentage points from 3.0% to 2.2%. This revision is only a month
after they released their 6-monthly World Economic Outlook (at the IMF annual
meetings in Washington), which highlights how quickly the world economic
environment has continued to deteriorate.
The downward revisions have been across all regions of the world, including emerging markets. In fact, the IMF's growth estimate for emerging markets has been revised down by a full 1 percentage point to 5.1%, while the growth estimate for advanced economies has been cut to -0.3% from +1.1% in October. This will be the first full-year contraction in advanced economies since the second world war.
Importantly, the IMF's world growth estimate is done on a PPP basis, which means that the significance of China, by weight, is substantially increased. This has the tendency of flattering the world growth estimate. STANLIB's world growth estimate is currently at 1.0% for 2009, which is below consensus, but has been done at market exchange rates and not on a PPP basis. Our world growth estimate is guided by the IIF's research.
In revising the forecasts down the IMF made the following key points:
The US economy will suffer, as households respond to depreciating real and financial assets and tightening financial conditions.
Growth in the Euro Area will be hard hit by tightening financial conditions and falling confidence.
In Japan, the support to growth from net exports is expected to decline.
The cyclical downturn in emerging economies is of a similar magnitude to that in the advanced economies when measured relative to higher trend growth rates
Among the most affected economies are commodity exporters, given that commodity price projections have been marked down sharply, and countries with acute external financing and liquidity problems.
Countries in East Asia, including China, generally have suffered smaller markdowns, because their financial situations are typically more robust, they have benefited from improved terms of trade from falling commodity prices, and they have already initiated a shift toward macroeconomic policy easing.
In line with market developments, the IMF's baseline petroleum price projection for 2009 has been revised down relative to the October WEO, from $100 to $68 a barrel.
While the reduction in commodity prices eases the burden on households in advanced economies and emerging economies in Europe and Asia, it lowers growth prospects in many other emerging economies.
The combination of stabilising commodity prices and increasing economic slack will help to contain inflation pressures. In the advanced economies, headline inflation should decline to below 1.5% by the end of 2009.
In emerging economies, inflation is also expected to moderate, albeit more gradually. However, in a number of these countries, inflation risks are still manifest, as higher commodity prices and continued pressure on local supply conditions have affected wage demands and inflation expectations.
The recent moderation of inflation risks has cleared the way for major central banks to cut their policy interest rates.
Comprehensive policy actions are being implemented to address the root causes of financial stress and to support demand, but it will take time to reap their full benefits. Market conditions are starting to respond to these policy actions, but even with their rapid implementation, financial stress is likely to be deeper and more protracted than envisaged in the October 2008 WEO.
Some governments have also announced fiscal policy measures to support demand. However, overall these measures are limited and projections do not build in fiscal stimulus that is under discussion but not yet adopted.
Financial conditions continue to present serious downside risks. The forceful policy responses in many countries have contained the risks of a systemic financial meltdown. Nonetheless, there are many reasons to remain concerned about the potential impact on activity of the financial crisis.
The process of deleveraging could be more intense and protracted than factored into these projections. Intense deleveraging could also increase the risks of substantial capital flow reversals and disorderly exchange rate depreciations for many emerging economies.
Another downside risk relates to growing risks for deflationary conditions in advanced economies, although these are still small, given well-anchored inflation expectations.
There is a clear need for additional macroeconomic policy stimulus relative to what has been announced thus far, to support growth and provide a context to restore health to financial sectors.
Room to ease monetary policy should be exploited, especially now that inflation concerns have moderated. However, monetary policy may not be enough because monetary easing may be less effective in the face of difficult financial conditions and deleveraging.
Overall the world economy is facing a protracted and severe economic slowdown. Many indicators of 'real' economic activity are at multi-decade lows, and still falling. Previous talk of the de-coupling of emerging market growth from developed market performance has long been abandoned. And at this stage I expect that world growth will only move back to trend in 2011, although there should be some signs of recovery in late 2009/early 2010. Under current circumstances it is very likely that corporate earnings expectations will have to be revised still lower in the months ahead, which should be taken into account when accessing equity valuations
