IMF slashes global growth forecasts
• Eurozone GDP expected to fall 0.5% during 2012
• UK set to grow 0.6% – sharp fall from earlier 1.6% estimate
• World growth downgraded from 4.1% to 3.3%
First, Eurozone GDP will collapse 5% without vigorous fiscal stimulus:
However, as the Eurozone crisis deepens,
and sovereign debts escalate, the Eurozone will not be able to afford fiscal stimulus.
----- Successive plans to restore confidence in the euro area have failed. Proposals currently on the table also seem likely to fail. The market cost of borrowing is at unsustainable levels for many banks and a significant number of governments that share the euro.
----- Two major problems loom over the euro area. First, the introduction of sovereign credit risk has made nations and subsequently banks effectively insolvent unless they receive large-scale bailouts. Second, the ensuing credit crunch has exacerbated difficulties in the real economy, causing Europe’s periphery to plunge into recession. This has increased the financing needs of troubled nations well into the future.
----- With governments reaching their presumed debt limits, some commentators are calling on the European Central Bank (ECB) to bear the costs of additional bailouts. The ECB is now treading a dangerous path. It feels compelled to provide adequate “liquidity” to avert systemic financial collapse, yet must presumably limit its activities in order to prevent a loss of confidence in the euro—i.e., a change in market and political sentiment that could lead to a rapid breakup of the euro area.
----- Five measures are needed to enable the euro area to survive: (1) an immediate program to deal with excessive sovereign debt, (2) far more aggressive plans to reduce budget deficits and make peripheral nations “hypercompetitive” in the near future, (3) supportive monetary policy from the ECB, (4) the introduction of mechanisms that credibly achieve long-term fiscal sustainability, and (5) institutional change that reduces the scope for excessive leverage and consequent instability in the financial sector.
----- Europe’s leaders have mainly focused on a potential longterm fiscal agreement, and the ECB under Mario Draghi is setting a more relaxed credit policy; however, the other elements are essentially ignored.
----- This crisis is unique due to its size and the need to coordinate 17 disparate nations. We give four examples of economic, social, and political events that could lead to more sovereign defaults and serious danger of systemic collapse. Each trigger has some risk of occurring in the next weeks, months, or years, and these risks will not disappear quickly.
Finally, if the Eurozone falls into a severe recession, the US will follow:
The bigger question remains what happens to the US, once i) Europe does not react aggressively to the threat of the biggest recession since 2008, and ii) its GDP does contract by 4% or more.