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The day before yesterday, the International Monetary Fund (IMF) confirmed what we have been discussing in Money and Markets for months … the risks of a worldwide recession are “alarmingly high” at present.
In downgrading yet again its projections for global growth for the remainder of this year and through 2013, the IMF correctly identified the two single biggest threats to reaching even this downwardly revised forecast:
• The euro-zone debt crisis, and
• The U.S. fiscal cliff.
According to the IMF: “Failure to act on either issue would make growth prospects far worse.”
The chart below lists the IMF’s revised forecasts for this year and next in select regions around the world. What jumps right out at you is the amazing disparity in growth prospects between the developed and emerging markets.
Click the chart for a larger view.
The developed world (U.S., Europe, Japan, etc.) continues to face a prolonged period of debt hangover, and deleveraging. Europe is in recession now. And Japan’s economy, having just emerged from one in 2011, may very well be headed for another contraction.
U.S. economic growth should average 2.2 percent this year, according to IMF data, which would be a welcome improvement from the second quarter’s dismal pace of just 1.3 percent. Those looking for a rebound next year are likely to be disappointed with the IMF projecting just 2.1 percent growth in 2013.
The looming threat of the fiscal cliff — including a toxic combination of spending cuts and tax increases — could make even this feeble forecast look optimistic.
It’s no surprise that the IMF sees increasing odds of a “serious global slowdown” if not outright global recession. In fact, the probabilities of this worst-case scenario playing out have increased four-fold since the IMF’s last outlook in April!
Meanwhile, on a decidedly more upbeat note, growth dynamics remain strong across most developing economies. Don’t get me wrong … emerging markets are certainly not immune in a worst-case global recession scenario.
They too are experiencing a slowdown, as reflected in the IMF’s reduced forecasts. But the dynamics in emerging markets are vastly different and more favorable for continued growth.
Strong employment growth, higher domestic savings rates and consumption, plus better fiscal balances should continue to “support healthy investment and growth” in emerging markets. Still, the IMF took a sharp knife to economic forecasts in Brazil and India.
Emerging Asia on the other hand, remains a bright spot with the IMF projecting GDP growth averaging 6.7 percent this year and accelerating to 7.25 percent in 2013. Of course realizing this forecast depends a great deal on whether China’s economy experiences a soft-, hard-, or crash-landing in the months ahead.
The two graphics below were included in the IMF’s 250-page report and perfectly capture the disparity between emerging and developed economies today.
Click the chart for a larger view.
In the graph at left, notice the bloated public debt levels in the major G7 economies (the U.S., U.K., Japan, Germany, France, Italy, and Canada) compared to steadily declining public debts in the developing world.
Above right, you can see the G7 government response to this crisis. Central bankers across the developed world have gone all-in to deflect by massively inflating their balance sheets across the developed world in a desperate attempt to deflect the inevitable impact of deleveraging.
This disparity should serve as a cautionary reminder to investors that perhaps the only thing propping up the global economy and financial markets at this point is unprecedented central bank money printing.
Good investing,
Mike Burnick
Mike Burnick, with 30 years of professional investment experience, is the Executive Director for The Edelson Institute, where he is the editor of Real Wealth Report, Gold Mining Millionaire, and E-Wave Trader. Mike has been a Registered Investment Adviser and portfolio manager responsible for the day-to-day operations of a mutual fund. He also served as Director of Research for Weiss Capital Management, where he assisted with trading and asset-allocation responsibilities for a $5 million ETF portfolio.