Future Outlook

Lawrence Zammit's article on The Times of Malta

Two weeks ago the International Monetary Fund published its latest analysis on the global economy as well as individual economies in its regular publication World Economic Outlook. The long and the short of this analysis is that economic recovery across the world is expected to strengthen. This shall be led by the more advanced economies. The economies that have done so well in the last few years, namely the emerging economies and the developing economies, are expected to deliver only modest growth. Thus the risks for the future seem to have shifted; which in itself is a very important consideration.

The question that stares at us in the face is why growth in the advanced economies will strengthen while growth in the less advanced economies will not. It needs to be remembered when the leading economies were forging ahead prior to the start of the financial crisis in 2008, they were pulling along the emerging economies and developing economies as well.

When the crisis hit, the less advanced economies continued to deliver strong growth. So is there a slowdown in their growth now? Is the growth in the advanced economies being achieved at the expense of the less advanced ones? Will the growth in the less advanced economies eventually slow down the more advanced ones?

In effect one of the downside risks which the IMF highlighted in its report is that the slowdown in the emerging market economies will be even greater. This looks so incongruent as the advanced economies were always seen as the main consumption base for the goods produced by the less advanced economies. So if there is growth in the advanced economies, why should there be a slowdown in the less advanced ones? Has this last period of international economic turmoil been so severe that it produced a change in society that will shape the economy in future?

One other risk that the IMF identified is the low inflation rates in the advanced economies. Will such low inflation, which is actually lower than expected, lead to deflation? The European Central Bank is doing all it can to avoid deflation in the Euro zone. It may well be that the rate of inflation will remain low in spite of economic growth and the reduction in the unemployment level. Could it be that the recession has created so much uncertainty that underlying consumption patterns have changed?

The IMF then mentions two other downside risks – incomplete reforms and geo-political tensions. The first is a critical element as some of these reforms are aimed at impacting essential elements of government expenditure. Will such reforms that are aimed at creating a more efficient and leaner public sector and at giving a larger breathing space to private enterprise, be put into effect and will they have the desired impact? Or will governments be tempted to go back to their old habits once the economy picks up?

Geo-political tensions are more difficult to define and understand and are fraught with uncertainties. Will the Ukrainian crisis leave an impact on the leading economies? Will there be increased volatility in financial markets as a result of this crisis?

These risks may be seen in the context of two specific developments. In recent weeks Greece was successful in selling its five year bonds to hedge funds and global investors. Is this a sign that Greece and other countries which were embroiled in the sovereign debt crisis, are starting to get out of the woods? Or is the confidence shown by the financial markets in this circumstance very ephemeral?

The second development is that the grass roots in the EU have now turned very definitely against the economic austerity programmes that were imposed to address public sector deficits. The call in most EU member states in this period that is leading to the elections of the European Parliament is very much pro growth and anti fiscal consolidation. How will this impact the decisions of the European Commission in the coming months?

The IMF report has certainly provided some good news about the present. However, when we take a look at the future, we find that this report has reinforced the uncertainty that continues to surround the growth that the advanced economies are experiencing. It is not known for how long the waters will remain murky.

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