IMF offers mixed economic picture, all eyes on Europe
The IMF has revised its view of global economic growth prospects: It’s a mixed picture, leaning towards poor.
The U.S. will have grown 2.2 percent by the end of this year, the IMF says. That’s not stunning, but still 0.5 percent higher than the fund’s previous prediction. The U.S. is expected to grow 3.1 percent in 2015.
The IMF reduced its prediction for growth in Europe from 1.1 percent to a mere 0.8 percent. Europe is still struggling with an 11.5 percent unemployment rate (the U.S. rate is 5.9 percent). The continent is precariously close to deflation – a form of economic stagnation that can last decades, as it did in Japan.
China’s growth is slowing and will continue to slow, says the IMF. It will decelerate from 7.7 percent growth in 2013 to 7.4 percent in 2014 and 7.1 percent in 2015.
“The U.S. is the one eyed man in the country of the blind,” says Jacob Kirkegaard, senior fellow at the Peterson Institute for International Economics. “The U.S. is the only one that seems to be turning in the other direction.”
Kirkegaard credits both the aggressive response of the U.S. Federal Reserve and the underlying “flexibility and dynamism” of the U.S. economy: “The U.S. is an economy that is able to absorb shocks far more rapidly than certainly the European countries but also Japan and it is an economy where simple entrepreneurship plays a much bigger role.”
“The U.S. is once again the rudder that’s going to keep the world steered in the right direction I hope,” says Ross DeVol, Chief Research Officer at the Milken Institute. The rising dollar and increasing consumer appetite in the U.S. will spur the export sectors of other economies around the world.
The modest success of the U.S. may also pose a challenge to the rest of the world. When the U.S. was in crisis, investors shifted money to developing and emerging economies. Now that the U.S. is getting back on its feet and interest rates may rise in 2015, the reverse is happening, says Stephen Kaplan, assistant professor of international affairs at George Washington University.
“It might be more difficult for governments and firms abroad to borrow in an environment where more capital is going to be dedicated to the United States,” he says.
The larger source of concern for many economists however is the situation in Europe.
“Europe is avoiding a technical recession but will get so close to one that you won’t know the difference,” says DeVol. “The global cycle is out of balance.”
Europe not growing at all, or very slowly, is not good for anyone in the world, says Matthew Slaughter, professor at the Tuck School of Business at Dartmouth.
Europe all together has the largest economy in the world. A weak Europe is less likely to import from the U.S. or China which is also slowing down. Slaughter says its problems – like an 11.5 percent unemployment rate and a not fully resolved sovereign debt problem – run deep.
“Those problems have been layered on top of what for many countries, even before the crisis, was this no growth in population, slow productivity growth environment they were already in,” Slaughter says.
Demographically, Europe is aging, Slaughter continued: “In many countries the labor force growth will be zero and there’s not much inflow of immigration so that dynamism from a young and growing population is not there.”
The European policy response to the recession has not been as aggressive or effective as responses elsewhere in the world.
“The combination of fiscal and monetary policy has just been too firm,” says Peter Fisher, senior fellow at the Center for Global Business and Government at Dartmouth. “It’s partly because they’ve been fighting a multiple front war – they’ve had to hold the euro together in addition to stimulating economy and that’s both a political challenge and an economic one.”
The IMF says Europe has a 38 percent chance of slipping into a recession again, double the odds in April.
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