IMF sees global pullback in 2011

Latest report highlights risks in banking system, fiscal and monetary policies
Tara Perkins, From Thursday's Globe and Mail
Positive signs in countries such as Canada, China and India should inflate global economic growth this year, but the forecast for 2011 is less sanguine.

The International Monetary Fund is now projecting world growth of about 4.5 per cent for 2010, up from its prior estimate of roughly 4 per cent. But that comes with a proviso: a new wave of financial turbulence has bolstered downside risks.

That is casting a shadow over 2011. Canada’s projected growth rate for 2010 has been ratcheted up to 3.6 per cent, from 3.1 per cent. But for 2011 it has dropped to 2.8 per cent from 3.2 per cent.

Here are some of the key risk areas the IMF is monitoring:

The banking system:There are early indications that banks in the euro area are tightening up their lending standards again. Those had been falling for about a year. It’s becoming harder to obtain a bank loan at the same time as non-financial corporate bond issuance has dropped in Europe. “If these tighter conditions continue, they could begin to have a significant impact on the availability of credit to corporates,” the IMF said.

It’s also concerned about bank funding. “Euro area banks are still hoarding liquidity and putting those funds in the ECB’s deposit facility,” it said. It called on policy makers not to delay reform of the financial system, which it said is urgently needed to restore the health of the banking system.

Fiscal policies:“Growth prospects in advanced economies could suffer if an overly severe or poorly planned fiscal consolidation stifles still-weak domestic demand,” the IMF warns. For politicians, “the overarching policy challenge is to restore financial market confidence without choking the recovery.”

Not an easy task. Even as it cautioned against dampening growth, it said that firm commitments to ambitious and credible strategies to lower fiscal deficits over the medium and long term are of the utmost importance.

“Most advanced economies do not need to tighten before 2011, because tightening sooner could undermine the fledgling recovery, but they should not add further stimulus,” the IMF said.

Monetary policies: Monetary conditions should generally remain highly accommodative for the foreseeable future to help mitigate the impact of fiscal consolidation and calm financial market jitters, the IMF said, adding that inflation pressures are subdued.

“If downside risks to growth materialize, monetary policy should be the first line of defence in many advanced economies. In such a scenario, with policy interest rates already near zero in several major economies, central banks may need to again rely more strongly on using their balance sheets to further ease monetary conditions.”