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Economic growth will be higher than projected, the IMF says, unless, of course, it’s not

posted on July 8, 2010 at 9:55 am
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economic recovery

Janus, the Roman god of beginnings, transitions, and doorways whose two-faced imaged looked both forward and back, would be proud of the IMF (International Monetary Fund) today.

The IMF raised its forecast for global growth this year to 4.6% from the previous 4.2% forecast in April.  (The IMF left its forecast for 2011 at 4.3%)

But the IMF also warned that continued turmoil in the financial markets has increased the risk that the global economy will stall.

In other words, things will be pretty good—unless, of course, they aren’t.

Break down that global growth, the IMF said, and you’ve got the United States and Canada leading the developed economies. The IMF raised its forecast for growth in the world’s developed economies to 2.6% for 2010, up from 2.3% in its April forecast. But (that ol’ Janus face again) the IMF also lowered its 2011 forecast for every member of the Group of 7 developed economies—except for the United States.

The U.S. economy will grow at a 3.3% rate in 2010 (up from the 3.1% rate predicted in April) and then by 2.9% n 2011.

Japan’s economy will grow faster than projected in April—2.4% versus the earlier 1.9% forecast—and then slow to a 1.8% growth rate in 2011.

For the economies of the Euro Zone, the IMF kept its 2010 forecast unchanged at a 1% growth rate and actually cut its 2011 projection to 1.3% from April’s 1.5% forecast.

Projected growth is higher in the world’s developing economies—faster even than the IMF forecast in April. The overall growth rate for these economies climbed to a projected 6.8% from 6.3% in April.

China leads the pack in this group with a forecast for 2010 growth of 10.5%, up from a forecast of 10% in April. The IMF forecast growth in India of 9.4% and in Brazil of 7.1%, up from 5.5% in the April forecast.

Inflation in the developing economies will climb to 6.25% in 2010 before interest rate increases bring it down to 5% in 2011, according to the IMF.

All that sounds pretty good, right? Well, don’t get too comfortable. It could all come apart, the IMF warned.

The biggest worry is that huge government deficits in the developed economies will undermine confidence in the financial markets as investors worry about future growth, future fiscal responsibility, and the potential for needed budget cuts to produce a double-dip recession.  Governments in the developed world need to implement credible plans to lower deficits.

But, the IMF warned in a warning to its warning, these governments should move carefully so that budget cuts don’t undermine economic growth and lead to an upsurge in unemployment. These countries don’t need to begin budget cuts until 2011, the IMF said.

And even then, governments in developed economies should be ready to change course quickly and completely, the IMF said, if risks materialize.

Think the IMF believes in hedging its bets?

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12 comments

  • dgoedken on 8 July 2010

    That’s worse than the weatherperson….Geez!!

  • Run26.2 on 8 July 2010

    Off Topic… Greece approves pension overhaul in principal:

    http://www.nytimes.com/2010/07/09/business/global/09drachma.html?_r=1

  • alpha on 8 July 2010

    The whole economic and financial system is so obscure. Cannot be known who’s exposed to how much risk, who owes how much to whom. Banks, corporations, countries lie about their state (in “creative accounting style”). Even statistics are cooked (see official vs. shadow statistics) – for instance, if the number is too ugly, redefine what we mean by unemployment in that we can write a nicer, less alarming number in the future. So where’s the best approximation of the truth then?

    I don’t see where in the developed economies sustainable growth can come from. All this market euphoria, based on an occasional positive data point is pure make-believe, in my opinion. But let me be wrong and let the bulls be right.

  • javos on 8 July 2010

    I’m getting a little tired of hearing myself say this, but…U.S. economy is 70% consumer driven, true unemployment is high and rising, stimulus is waning, consumer saving is rising, interest rates can only go up, housing inventory is still rising, sales tax revenues are falling.

    What IS IT about economists that blinds them to such macro trends?

  • Seaturtlelady on 8 July 2010

    Javos…

    Does that translate into keeping cash on the side and stay in the “holding” pattern here???

    Thanks a bunch!

  • OJunker on 8 July 2010

    Jim or Ed,

    Off subject but what is your take on BX? Good divy, low PEG and seem to be out of the limelight now that GS is the bad guys.

  • Christopher on 8 July 2010

    A lot of what the IMF said seems to be either old news (at least in the US, like before the last few of weeks), or just echoing what the G20 stated they would like to see. Economists seem to have a poor track record at the best of times, and this isn’t the best of times, and the IMF seems to work more as a banker that wants its money back then person that it knows or wants its clients to succeed.

    I wouldn’t stake a dime on what they have to say.

    Seaturtlelady,

    Personally I’m pretty much in an holding pattern (have been for a few weeks), but I would certainly love to hear how others think.

  • sigli on 8 July 2010

    We need to keep in mind we are not cutting deficits. We’re cutting the annual shortfall going forward, or bleeding less. This lower level of deficit spending is stimulative, while offering the bond market a token for stability’s sake. That could push interest rates lower as bond confidence kicks in. Obviously this will help consumer’s balance sheets as refinances put more money in consumer pockets.

    Private wages are higher in the face of low inflation, which may actually be overstated. That means real wage growth is occurring in the USA. That will provide govt. a revenue source without killing growth like the fear mongers are ever predicting. You can argue that taking a chunk of the growth will slow growth, but realize taxing a chunk of growth to support redistributive programs still leaves a chunk of growth with citizens.

    Yes we can spend less, raise taxes, and grow.

  • compay on 8 July 2010

    STL and others,
    I am just an average investor following this Board. My 2 cents is everything is to weird right now. Not worth chasing pennies. I’m 40% cash, 30% in domestic stocks, 20% foreign stock and 10% gov’t bonds. chill’in to October.

  • Domino412 on 8 July 2010

    Me Too. I’m only in roughly 20%. Been that way since the May Flash Crash. When I took a huge hit. Like an idiot, I didn’t keep my stops raised with the market, so I got sold out way low. So, after that burn, I’ve been extremely cautious. Not in any hurry to make a move. I’m looking to buy some Dec. call options though, if we get another pullback.

  • javos on 8 July 2010

    Seaturtlelady, before I respond, let me share my profile: retired, frugal, debt-free, 401k and pension assets yet untouched, living on social security, net worth $1M+, and probably have a higher risk and volatility tolerance than most investors.

    I’m 90% cash, 10% 3X leveraged short the Russell 2000 (TZA). I’m shorting the small caps because I think they will do much less well than the mega caps with global reach.

    I intend to add to my TZA position if it is confirmed over time.

    Wild card is another mega-stimulus targeting jobs. Unlikely, given the Tea Party effect on both Dems and Repubs, but can’t rule it out.

    I am NOT MARRIED to this scenario. “Discipline over conviction.”

    Hope this helps.

  • EdMcGon on 9 July 2010

    OJunker,
    Why is BX paying a dividend? They are heavily leveraged with short term debt, and their ROI is negative 45%. On the bright side, the inside ownership is 68% (as the saying goes, at least they’re eating their own dog food).

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