The latest assessment of global economic prospects from the IMF does not make for pleasant reading.
The influential organisation has again had to revise down forecasts it made in July in a significant way.
Economic forecasting is, by definition, a hazardous business and one that is not characterised by any level of certainty or indeed accuracy, but it is still quite unusual to see such marked revisions to forecasts originally made so recently. Worryingly, the majority of the downward revisions relate to 2013.
It is very clear from the IMF’s analysis and from most other analysis that global policymakers are still scratching their heads trying to come up with solutions to the five-year-old economic crisis that has many resonances to the 1930s.
The IMF’s global growth forecast for 2013 has been revised downwards by 0.3%, with Spain revised down by 0.7% and the eurozone as a whole down by 0.5%. The US has been revised downwards by just 0.1%.
Of course one can ignore all of these statistics and indeed for most of us, it is not terribly clear what a downward revision of 0.5% to a growth forecast actually means in real terms.
What it does signify is that disastrous global growth is set to persist for the foreseeable future. For Ireland, this is obviously not good news, given our growing dependence on exports.
The reality is that many countries in the developed world, particularly in Europe, are characterised by high unemployment, unsustainably high levels of government debt, and extremely sluggish economic growth. The key response has been to take interest rates to historically low levels, with the ECB’s official rate just 0.75%. The point is that if such interest rates do not prove effective, then what is the point in cutting them any further?
So what do we do? The IMF has argued that the ECB needs to buy government bonds to get borrowing costs for sovereign states down; get the European Stability Mechanism up and running; and push towards a banking union and greater fiscal integration.
The aim really is to take financial pressure off the peripheral countries, but by implication this means that the burden will have to be borne by the stronger countries. The Dutch, Finns and Germany are not overly enamoured with such a prospect. In addition, ECB president, Mario Draghi, ruled out the possibility of the ECB printing money, as has happened in the US.
It is becoming clearer by the day that if the ECB does not print money, and if fiscal austerity does not ease, the Greeks in particular will not be able to remain in the euro and indeed the whole future of the currency is still very much up in the air.
European policymakers will have to do some non-Germanic and unorthodox things if the project is to survive.
The lack of economic growth is the real problem and even the IMF is admitting it under-estimated the negative economic impact of fiscal austerity. The S&P downgrade of Spanish debt to a notch above junk bond status sends a clear message about how the reticence of the ECB is viewed.
Mr Draghi’s comments throw some cold water on Ireland’s prospects for a bank debt deal. However, all is not lost. In San Francisco recently, I was shown a development that investors borrowed from a now defunct Irish bank, and which was sold at a loss of €18m to Irish taxpayers. It struck me just how mad it is that ordinary taxpayers should be forced to bear the burden of mad investment and lending at the other side of the world, but that is the situation we have been put into.
On a very bright note, the Kerry Foods and Paddy Power announcements this week are very heartening, and shows that there is a chance of creating a new Irish economic model provided we concentrate on the correct areas.
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