IMF: Only Japan Shines As U.S. Lags, Europe's Recession Deepens And China Brings Down EMs

from forbes

Japanese Prime Minister Shinzo Abe is probably smiling after seeing the IMF's numbers - Image credit: AFP/Getty Images via @daylife

Growth in the U.S. has been disappointingly slow, there’s a deeper recession in the Eurozone, major emerging market economies are suffering, and the only bright star appears to be Japan, the International Monetary Fundsaid on Tuesday.  The institution headed byChristine Lagarde lowered its global growth outlook  noting increased financial volatility, speculation about the Fed’s taper, and slow domestic activity across emerging markets, particularly in China, conspired to keep the global economy just muddling along.

A bearish report by the IMF.  The global economy will grow only 3.1% this year, with output inching up to 3.8% next year, a quarter percentage-point downgrade from the IMF’s April numbers.  What is problematic is that everyone seems to be set for slower growth, with the exception of Japan which is currently engaged in massive quantitative easing and pushing every possibly lever to jump-start growth.

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The U.S., which the IMF had recently noted was breaking apart from its fellow so-called advanced economies, saw its growth projections cut to 1.7% and 2.7% this year and next.  The IMF noted the impact of the sequester would linger on for longer than expected, and that growth came from strong demand, particularly in the housing sector.

And while homebuilders like KB Home and Lennar LEN -1.29% have been trading near multi-year highs recently, one of the major areas of concern is monetary policy, which has provided extraordinary support to the housing sector and others.  Fears over Bernanke’s tapering have fueled global financial volatility, pushing interest rates higher across advanced economies.

Uncertainty over the Fed’s exit strategy has hit emerging market economies the hardest, the IMF explained, fueling dangerous capital inflows that were exacerbated by domestic problems.  “The weaker prospects reflect, to varying degrees, infrastructure bottlenecks and other capacity constraints, lower export growth, lowercommodity prices, financial stability concerns, and, in some cases, weaker monetary policy support,” noted the fund, adding that growth would moderate to 5% in emerging markets this year, hitting 5.5% in 2014.

Much of the uncertainty resides in China, where the government has engineered a dangerous liquidity squeeze to clamp down on a massive shadowbanking system.  China is forecast to grow 7.8% and 7.7% over the next to calendar years respectively.  Central banks across the emerging market space face a difficult challenge, being forced to manage supporting weaker output while containing outflows.  As currencies have depreciated against the dollar, space for easing is limited given inflationary risks and rates that are low by historical standards.

Another dark spot in the global economy is Europe, which is expected to suffer a deeper recession than previously expected.  The Eurozone will contract by 0.6% this year, the IMF said, but should bounce back to growth in 2014, output expanding 0.9%.  European leaders including Germany’s Angela Merkel and the ECB’s Mario Draghi include low demand, depressed confidence, financial market fragmentation, weak balance sheets, and fiscalconsolidation.  The IMF’s researchers spoke of the need for continued “do what it takes” action from European policymakers, and the need to push forth with a banking union that establishes a strong single resolution mechanism.

The unexpected star in Tuesday’s revision was Japan.  Growth should jump to 2% this year, catalyzed by Prime Minister Shinzo Abe’s comprehensive set of policies that included massive quantitative easing.  The Japanese economy should grow 2% in 2013, slowing to 1.2% next year on the back of consumption and stronger net exports.  The 2014 slowdown reflects weaker global markets, the IMF said.

The latest set of numbers from the IMF suggest downside risks have increased, particularly after a marked increase in global volatility in the aftermath of Ben Bernanke’s suggestion that QE tapering could begin this year.  As investors recalibrate their models to prepare for slower growth, emerging markets, previously an engine during times of crisis, will also add proportionately less to a global economy that is proving to be less resilient than expected.