Eurozone’s financial woes cast pessimism over global growth forecasts in 2012
The lingering eurozone’s financial problems and other dismal global economic fundamentals have forced the leading international experts and authoritative financial institutions to finally abandon their budding optimism on more palpable recovery from the current economic quagmire in 2012 for more pessimistic views on regional and global business growth prospects.
The gloomy views and moods were aptly described in vivid terms by the organizers of this year’s Annual World Economic Forum (WEF) in Davos, Switzerland, when they noted at the closure of the event that today’s global economic outlook — after days of intense brainstorming discussions by the world’s best intellectual, business, arts, cultural and social giants in over 260 sessions on key issues of international importance — is ‘a highly troubled world being seriously pressed for urgent solutions across a number of fronts.’
Notably, Klaus Schwab, the WEF founder and president, was particularly very blunt in his condemnation of the current modern model of capitalism for completely losing contact with today’s realities, the culprit of the current global financial crisis. “Capitalism, in its current form, no longer fits the world around us,” he said, adding that, “today, we are increasingly facing the prospects of a ‘dystopian future,’ where the world’s political and economic elites are in danger of completely losing the confidence of the future generations.” To rectify such negative trends, Schwab called for an urgent global transformation that must start with reinstating a global sense of social responsibility.
IMF’s view and revised forecasts on global economy
These negative trends are equally evident in a myriad of recent significant downward revisions of key economic fundamental indices by major international financial powerhouses. One of these giants to radically review downward its annual Global Growth Forecast data is the International Monetary Fund (IMF), which, citing the intensifying strains in the eurozone, has painted a landscape characterized by dimmed economic prospects and increased risks to financial and fiscal stability across the globe in 2012. In an update to its recent World Economic Outlook (WEO), the IMF expects the eurozone to fall back into another round of recession later in the year following the plunge of the ongoing continental debt crisis into a ‘new perilous phase’ that is now affecting other parts of the world, including the United States, emerging markets and developing countries.
“Davos’ WEF has seen today’s global economic outlook as ‘a highly troubled world’ being seriously pressed for urgent solutions simultaneously across a number of industrial fronts.”
Overall, the IMF now expects the activities in advanced economies to expand by just 1.2% in 2012, a downward revision of 0.75 percentage points from its 2011 forecasts, while the global growth outlook is now expected at just 3.3%, with most of the growth coming from China. Along with these revised WEO forecasts, the IMF also released new updates to its Global Financial Stability Report (GFSR), a dissertation that tracks key issues and trends on the global banking and capital markets, and its Fiscal Monitor, a dissertation that studies national governments’ debts and budgets.
Commenting on these issues, Olivier Blanchard, the IMF’s economic counselor, noted that the current outlook for growth is ‘mediocre,’ and could be worse. “The global economic recovery, which was very fragile in the first place, is now in danger of stalling. The epicenter of this danger is Europe, but the rest of the world is increasingly becoming affected.” Stressing that even a greater danger is ahead if the European crisis intensifies, Blanchard noted that such a negative case could plunge the world into another recession. “Given the depth of the 2009 recession, today’s projected growth rates are too sluggish to make a major dent on today’s global economic outlook.”
Russia among the few bright spots on EBRD’s revised forecasts
If the IMF, by its status, looked at the worsening eurozone crisis’ negative implications from the global economy’s perspective, the European Bank of Reconstruction and Development (EBRD) limited its study of the same problem to the negative impacts the crisis will have on countries in the region of its operations, which includes Central, Southern, and Southeastern Europe, Central Asia and Turkey.
The bank, like the IMF, has also drastically reduced its 2012 overall economic growth forecasts in areas of its core operations, warning that a further deterioration of the financial crisis in the eurozone could have a more substantial negative impact throughout the region.
Specifically, the EBRD, in its latest Regional Economic Prospects report, sees a significant overall slowdown in growth across its 29 countries of operations to a mere 3.1% in 2012, down from 4.8% in 2011. Although this outlook assumes no further deterioration in the eurozone crisis, the report assumed the existence of ‘substantial risks’ in its baseline scenario. “A further worsening of the eurozone turmoil would pose a systemic challenge to emerging Europe because of the deep integration of its banking sector with eurozone-based banks. Such a negative scenario, with a possibility of negative cross-border spillovers, will be compounded by the re-emergence of uncoordinated national policies. Besides, the eurozone region will also be negatively affected by a resulting slowdown in the United States, other major markets and from linked declines in commodity prices.”
“IMF expects the eurozone to fall back into another round of recession later in the year following the plunge of the ongoing debt crisis on the continent into a new perilous phase.”
In its baseline scenario, the EBRD report assumes that deleveraging by international banks active in its region of operations will be managed in a collective response that — as in 2008-09 — involves governments, international agencies and banks. “It is absolutely essential that we build a coordinated response to Western bank restructuring that fully takes into account the impact on Eastern Europe. Any failure to do so would mean a significant setback for emerging economies,” Erik Berglof, the EBRD’s chief economist, said.
The 3.1% growth forecast across the whole EBRD region is roughly in line with predictions made last October, but the new report underscores a growing divide among the 29 countries that constitute EBRD’s region of operations. It notes that Central and Southeastern parts of Europe are particularly exposed to eurozone’s financial and fiscal duress, with Slovenia and Hungary most likely to see a return to recession. The report revised the 2012 forecasts for Central Europe and the Baltic states down to 1.4% from the 1.7% in October. Referring to Hungary, the country in the EBRD region that is most exposed to the eurozone, it said that the external problems faced by Hungary had been compounded by a series of domestic policy mistakes that had unnerved investors. In Southern and Eastern Europe, the growth forecast has been revised downwards by 0.6 percentage points to 1.0%.
However, countries such as Russia and other CIS states, which are comparatively less integrated with Western Europe, are continuing to enjoy decent growth, thanks in part to significantly elevated commodity prices. Thus, the 2012 forecasts for Turkey and Russia, the region’s major economic drivers, have remained unchanged from October at 2.5% and 4.2%, respectively. But the new forecast growth rate for Turkey would be a sharp slowdown from the 8% recorded in 2011. But in contrary to the gloomy pictures painted above, the EBRD sees some robust business activities in Central Asian countries, where growth is expected to grow to 7% in 2012, up from an October forecast of 6.6%.
At the same time, the outlook for Eastern Europe and the Caucasus, the closest to Western Europe within the eastern transition regions, has somewhat worsened, with growth in Eastern Europe and the Caucasus now seen at 2.6%, compared with a previous forecast of 3.2%. One of the largest economies in the region, Ukraine, is likely to be quite affected by the eurozone crisis, with the most recent industrial production data already suggesting a slowdown. The report forecasts that the economy in Ukraine will expand by 2.5%, down from 5.0% in 2011, and compared with a forecast of 3.5% last October.
The EBRD report also says that the ongoing turmoil in the eurozone will affect economic outputs in the transition region via financial, trade and remittance channels. A recession in the eurozone economy will translate into weaker export markets for its eastern neighbors, a negative effect that will be compounded by a fall in foreign direct investments and shorter term financing for the EBRD region.
“EBRD says Russia and other CIS states that are comparatively less integrated with Western Europe will continue to enjoy decent growth in 2012, thanks in part to elevated commodity prices.”
The report also noted that robust capital inflows to the region had turned into massive outflows in the third quarter of 2011, the first time since 2009, a situation that is unlikely to change during the year, when capital is scarce and risks remain high in Western Europe. There has also been evidence of Western bank deleveraging in most new EU member countries since last autumn. The EBRD report warns specifically that Western banks’ subsidiaries in Eastern Europe will receive less support from parent companies, which are also currently facing the acute problems of strengthening their balance sheets. As a result, the subsidiaries will make less credit available to their host countries’ financial markets, thus contributing to a more marked slowdown in these economies.
An outline of expert’s exit strategies from the crisis
The analysis and presentation of experts’ opinions on the problems of the debt crisis in the eurozone and its toxic contagiousness for the entire global economy would not be complete without listing their prescriptions on exit strategies from the current financial quagmires in the global and national economies.
One of such prescriptions was voiced by IMF Managing Director Christine Lagarde, who has laid out the main elements of a policy to address the eurozone crisis, noting that Europe, which is at the epicenter of global concerns, needs stronger growth, larger firewalls and deeper integration to overcome its current financial and fiscal distress. “But other major economies also have an important role to play to restore balanced global growth. As for multilateral support, the IMF is ready to help and is seeking to increase its lending resources by up to $500bln.”
Airing a similar view, Jose Vinals, the head of the IMF’s Monetary and Capital Markets Department, called on all European policymakers to promptly put in place a comprehensive package that restores confidence to eurozone economies and implement the policy measures agreed at the October and December eurozone summits. “This is because despite the efforts of European policymakers to contain the eurozone debt crisis and related banking problems so far, a new and more comprehensive decisive policy response is still needed to get the required results.”
From its side, the EBRD has, as its recipe for averting such a gloomy scenario, pointedly called for a much more coordinated response from all the parties involved in seeking urgent solutions to the eurozone crisis so as to limit its negative impacts on Eastern Europe. Similarly, calling for urgent solutions to these woes, IMF’s Blanchard also expressed confidence that all is not yet beyond redemption, noting that well and highly coordinated efforts could still produce wonders. “With the right set of measures, the worst can definitely be avoided, and flagging recovery can still be put back on track. These measures need to be taken urgently.”
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