IMF Cuts Forecasts for The World Economy Growth – How will it impact the Asia-Pacific Region?

According to excerpts obtained from Bloomberg Online news article published on October 08, 2013, entitled, “IMF Cuts Global Outlook, Warns of US Default Threat”, the International Monetary Fund (IMF) has published its latest World Economy Outlook report, which highlights some of the economic challenges faced by many emerging countries in the Asia-Pacific region, including uncertainties over the current debt ceiling gridlock in Washington D.C., a potential US Federal Reserve (US Fed) move to start its tapering process by December 2013 (a growing threat, but may be tempered by the uncertainties over the duration of the federal government shutdown in the US capital, and the just announced news (as of Asian early morning trading hours on October 09, 2013) US White House official nomination of current Vice-Chairman of the US Fed, Ms. Janet Yellen, to be the next Chairman come January 31, 2013, when current Chairman, Mr. Ben Bernanke is scheduled to step down), impact of prolonged capital controls being implemented in some emerging economies will have on currency volatilities as a result of the recent massive capital outflows due to the concerns over the US Fed tapering initiatives, etc.

In its latest economic assessment of the world economy, the IMF forecasted growth for 2013 will likely turn in approximately 2.9 percent, and for 2014 at 3.6 percent, down from its previous July 2013 forecasts of 3.1 percent and 3.8 percent respectively. It now sees emerging economies growing at approximately 4.5 percent, 0.5 percentage point less than its July 2013 forecast, as economic projections for China, Mexico, India and Russia were reduced, citing challenges faced including a global economic slowdown, and tighter global financial conditions as advanced economies will start to hike interest rates eventually due to a slow, but much positive outlook for some of these advanced economies. The latest economic assessments for the world economy came with assumptions that the current US federal government shutdown will be short-lived, and an eventual US Congressional agreement to raise the nation’s debt ceiling limit. Both sides of the aisle (Republicans and Democrats) in the US Capitol are working to end the current budget stalemate by October 17, 2013, but remains stuck as US House of Representatives Speaker John Boehner has repeatedly called for further negotiations with the Democrats and the US President to make changes to the upcoming implementation of the nation-wide health insurance scheme, or Obamacare.

The IMF chief economist, Mr. Oliver Blanchard spoke at the October 08, 2013 news conference while presenting the latest World Economy Outlook Assessment Report that the potential effects of a prolonged US Federal Government shutdown, and the debates over the raising of the US debt ceiling could threaten the financial systems both in the US, and around the world. Mr. Blanchard, like his current boss, Ms. Christine Lagarde, and other major world leaders, including China and Japan, have been voicing out their concerns over the current fiscal battles in US, and the consequences of US not honouring its debt obligations come October 17, 2013, if both sides of the chambers do not come to an agreement. The two Asian nations of China and Japan account for the majority of the current debt holders of the US Government Treasuries. Mr. Blanchard expressed some optimism over the ending of the US budget debates, and recognised it as a tail risk, with low probability, but could be a major disruptive event in the US goes over the debt ceiling, resulting in systematic defaults. The Chicago-traded VIX Index (an implied volatility measure of the US stock markets) spiked up to an historical high this week, and might continue to surge even with the recent announcement of the nomination of Ms. Janet Yellen to become the next Chairman of the US Fed on January 31, 2013. Most financial markets in the Asia-Pacific region (as of early Asian morning trading hours on October 09) are pricing lower opens, with the exception of Japan’s Nikkei Futures, which is hovering around 13,860 to 13,890 levels, despite a strengthening of the Japanese Yen currency towards the 97.00 handle to the US Dollar.

The IMF, in the report, provided some policy recommendations for some of the emerging economies, including China such as adopting more growth-oriented policies targeting at all three areas including fiscal, monetary, and structural reforms which will help to boost consumption, liberalise trade and investment conditions, minimal currency interventions, fiscal consolidation such as spending cuts, and possible raising of taxes to cope with the shortfalls in revenues, and to cushion themselves from the potential severe disruptions to the financial system as a result of severe market corrections, etc. For Japan, the institution continues to maintain its economic outlook at 2.0 percent in 2013, and 1.2 percent in 2014, but it strongly urged the Japanese Government to work towards maintaining a stronger fiscal balance sheet, coupled with additional rounds of monetary stimulus if the country does not manage to raise inflation expectations to its target of 2.0 percent.

The conclusions drawn from the latest economic assessments this past week, and last week by the IMF, the World Bank, and the Asia Development Bank (ADB) have generally aligned with one another, in that, most Asia-Pacific economies are generally making some progress in helping to boost economic growth in their respective regions through trade and investments, but external shocks such as the possible prolonged US Federal Government shutdown, the failure to come to a consensus in the US Capital to raise its debt ceiling limits, an eventual withdrawal of the US Fed stimulus programme in the coming months ahead, slow corporate earnings both in US and globally due to the various uncertainties, slower than expected production and consumer spending numbers, etc. could pose some challenges to the Asia-Pacific region. However, I do remain hopeful that these issues can be resolved soon if the economies in the Asia-Pacific region will work towards the acceleration of its various free trade agreements, including the ASEAN –China Free-Trade Agreement, the Trans Pacific Partnership (TPP) Agreement, liberalisation of its currencies, implementing tough fiscal and monetary reforms that are growth-oriented, and investment friendly, etc. which could potentially hedge against the severe disruptions to the financial systems, caused by some of the external shocks coming from outside the region that might pose a threat to many developing Asia-Pacific economies, including China, India, Mexico, Russia, etc. The combination of fiscal, monetary and structural reforms are seen as critical in the face of a much subdued economic outlooks as expressed by these three economic institutions.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc

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