At the news conference on the occasion of the publication of the IMF World Economic Outlook, Olivier Blanchard, director of the Research Department of the IMF, said jokingly that global economy in the past six months was moved by a roller coaster. Sometimes we call this facility in the entertainment parks a "horror train". And indeed the undertaken audacious measures, to ensure fiscal stability and improvement of the macro economic environment, will cost a lot to the markets and the citizens, while the feeling will be the same - between fear and pleasure as a result of the high levels of adrenalin.
Although some think that Greece is small and unimportant, it was in the centre of attention not only in Europe but all over the world for one reason only - it marks the beginning of a new post-globalisation economic theory, in which stability is measured in a different way. It is no accident that in IMF's report, when preparing the outlook data it is assumed, that such a collapse as in Greece in the end of last year must be avoided.
The risks for the global economy stem from the geopolitical uncertainty, which hides an unpleasant perspective of a jump of fuel prices. Possible high budget deficits and debt, on the other hand, could lead to problems on the stock and financial markets with sudden soarings of interest rates. The mortgage crisis in the US is still smoldering and therefore is still on the agenda, because many households have large debts, which is why domestic demand and purchase capability are low.
When discussing the outlook on March 30, 2012, the executive directors board of the IMF have come to the conclusion that the calm now provides an excellent opportunity for lawmakers for a final exit of the crisis. This will only happen, though, if the started changes, aimed at ensuring stability, are implemented consistently:
- fiscal consolidation, which is an important base for growth;
- reducing banking sector indebtedness through shrinking credit and investments.
Brick by brick = BRICS
The Fund's analysis about the BRICS countries (Brazil, Russia, India, China and South Africa) is not bad against the backdrop of the overall stagnation. A month ago, at their summit in New Delhi, these countries vowed to undertake a number of initiatives - for free trade, for coordinated impact on international institutions and for a new bank that would finance projects related to infrastructure and sustainable development, and to help the global and regional financial institutions in their efforts to achieve growth and development.
The context of such a union is quite favourable - USA is still rehabilitating some of its sectors, the EU is focused on the debt crisis and the domino effect did not miss Japan too. In spite of the good outlook for the rapidly developing economies, however, they are also facing risks, stemming from global interconnectedness. IMF recommends the dynamically developing nations to properly adjust their macro economic policies with the aim to withstand negative impacts, like:
- declining exports, caused by the slow growth of leading economies;
- volatility of raw materials prices, which affect as the importing countries, so the export oriented nations;
- the changes of capital flows.
In the outlook for the dynamically developing countries a view is set forth that the above mentioned threats could be avoided through skillful use of monetary reserves and the existing in a number of countries state-provided fiscal area for manoeuvres, which would allow them to tackle internal indebtedness too. According to the IMF data, an increase of the current tempo of GDP growth in 2012 cannot be expected for the BRICS countries (except Brazil). On the contrary, the analysis envisages by the end of 2012 the pace of growth to slow down for China by 10 percentage points, for India and Russia - by 3 points and for South Africa by 4.
For Brazil an increase of the current speed is expected by 3 percentage points. UNtil 2017 the outlook is relatively good, as it is expected the Latin American country to reach a level of GDP growth of 4.1%, which is 1.4% more than the current development of its economy. An increase of growth, compared to the 2011 levels, can be expected also for India and South Africa, while China and Russia will have sustainable growth, but they will not increase their current tempo.
India and China
In the last months the Asian countries activity depends on external and internal processes. The European crisis is reflected on the continent, most of all by exports. In some economies, like India, internal factors also contribute to the slowing of growth - high borrowing costs, deteriorated business environment and weak policy in the area of investment. Here fiscal consolidation and undertaking actions to tighten belts would be essential and are recommended by the IMF. They will ensure better sustainability and will give grounds for actions for future challenges.
The big decline of China's surplus to some extent is a result of the very high levels of investments. The official data for demand and savings, which cover the period until the end of 2010, do not show yet that internal demand has increased in terms of GDP share and that national savings have decreased. The policies under the 12th 5-year plan, though, focus on increasing household income, demand and facilitating growth in the services sector. If these continuing structural reforms are to be implemented, China will have greater potential to boost internal demand, than for investments, aimed at achieving a reduction of the current account deficit. This, in the end of the day, would lead to long-term transformation, rather than being an instrument for increasing welfare of people and will significantly contribute to a strong and balanced growth globally.
Brazil's vulnerability, in the context of a general stagnation, is manifested in two directions: exports and the raw materials prices, on the one hand, and the activities of Spanish banks in the region, on the other. The good news is that the presence of European banks in the country is via branches, which are financed by local deposits. This to some extent prevents the direct import of stagnation of the banking sector that has gripped the Old continent. The unstable capital flows are one of the most threatening factors for the dynamically developing economies, as was especially emphasised in the declaration of the five countries from their summit in New Delhi this spring.
Brazil resorted to tools like taxing some incoming flows, imposing requirements for specific currencies, etc. The result from the good macro economic practises is growth of 2.7% in 2011. The higher imports and the risk of new changes of the capital flows remain problematic areas. And here the advice of the experts is fiscal consolidation to continue, especially for the purpose of maintaining debt sustainability, and also to protect the social and infrastructure expenditures. The fiscal policy, in terms of export of raw materials, would be wise to focus on saving money, while the resources are still expensive.
Resources trade is the main factor for growth in Russia. But the Fund's estimates show that the non-oil deficit has tripled since the beginning of the crisis and in the same time the oil reserve is being drawn. Subduing inflation must be a priority for Moscow's monetary policy. The main threat for Russia comes from deepening of the crisis in the euro area, which will lead to huge trade losses. Hereafter, unfavourable effects can be expected for the other former Soviet republics, whose main investor and trade partner is Russia. Nevertheless, the expectations of the Fund for the economic growth of the country circle around 4% for 2012 and below 4% in 2013.
The African countries register growth in 2011, in spite of some unfavourable regional developments, like goods shortages because of the drought in some areas and the civil conflict on Cote d'Ivoire. But South Africa's problems originate in the crisis in Europe, which has led to prices volatility of bonds, a decline of exports and a reduction of foreign aid. The challenge South Africa is facing is to tackle high unemployment. In 2011 it reached 24.5%. The expectations of the experts of the Fund are in 2012 unemployment to be reduced by 8 percentage points.
If the slowing down there proves longer and in case the inflationary indicators are more modest, the country will need additional financial support, aimed at boosting the quicker taking of the country on the growth path.
The IMF outlook for the BRICS countries promises a moderate climate, without drastic temperature changes. It is now and especially through the negatives of the crisis with the European banks, that good opportunity is opening for the creation of their new bank. This is how BRICS will apply the most traditional method of exerting influence - funding - which will for sure be of benefit for the realisation of their continuous striving for "official recognition" of their power.