News Column

US, Emerging Economies Leaving Europe Behind

April 16, 2013

Frank Fuhrig, dpa

dollars and euros

Emerging and developing economies continue to be the engine of global expansion, while the United States is poised to pull away from slow-growing Europe, the International Monetary Fund said Tuesday.

With the eurozone mired in recession, the IMF pared back its global projection for 2013 growth by 0.2 percentage points to 3.3 per cent. The crisis lender kept 2014 worldwide growth pegged at 4 per cent.

Emerging and developing economies are slated to continue to deliver the lion's share of global expansion, rising to a projected 5.3 per cent growth in 2013 and 5.7 per cent next year, in the IMF's twice-annual World Economic Outlook.

After shrinking by an estimated 0.6 per cent last year, the eurozone economy is projected to contract another 0.3 per cent in 2013 before crawling back into the black with 1.1-per-cent growth next year, the IMF said.

The US, which has generally shared Europe's slow growth tendencies since the 2008 financial crisis, can expect 1.9-per-cent growth this year and a more robust 3-per-cent expansion in 2014, according to IMF projections.

"What was until now a two-speed recovery, strong in emerging market and developing economies but weaker in advanced economies, is becoming a three-speed recovery," IMF chief economist Olivier Blanchard said.

"Emerging market and developing economies are still going strong, but in advanced economies, there appears to be a growing bifurcation between the United States, on one hand, and the euro area on the other."

The IMF expected even sharper contraction than previously forecast this year for the eurozone, especially troubled economies Italy and Spain.

Blanchard said that "adverse feedback loops" of weak banks, government fiscal risk, low activity and low confidence "are still reinforcing each other."

"Most euro periphery countries, notably Italy and Spain, are expected to have substantial contractions in 2013," he said. "The process of internal devaluation is slowly and painfully taking place, and most of these countries are slowly becoming more competitive. External demand, however, is just too weak to compensate for even weaker internal demand."

The Italian economy was projected to shrink by 1.5 per cent this year, while Spain is expected to contract by 1.6 per cent; both would return to growth of less than 1 per cent in 2014, forecast the IMF.

The IMF said that tight credit conditions have continued to hurt the eurozone, with "deep recessions continuing across much of the periphery and weakness spilling over to the core, reinforcing weaker near-term growth dynamics in these economies."

Last week, IMF managing director Christine Lagarde rapped the European Union for failing to push forward with banking reforms, particularly on its periphery, and urged Brussels to "clean up" the financial sector by recapitalizing, restructuring or "where necessary" shutting down banks.

The continued weakness of banks has made it difficult for businesses and consumers to take advantage of the European Central Bank's loosening monetary policy, she said.

Tuesday's World Economic Outlook noted that some risks have declined in recent months.

US budget cuts have made a significant dent in Washington's deficit, though at some cost to growth. Meanwhile, the eurozone's decisive actions - shoring up its bailout mechanisms, reaching a deal on Greek debt relief and forging agreement on a single banking supervisory mechanism - have restored faith in the monetary union.

But this year's expected slow growth of 0.6 per cent in Germany and 0.1-per-cent contraction in France - the two economic powerhouses at the core of the eurozone - portend risks of stagnation, stress in the financial system and political fatigue that could derail badly needed structural reforms.

"Recent good news about the United States has come with renewed worries about the euro area," Blanchard said. "Given the strong interconnections between countries, an uneven recovery is also a dangerous one."

Deficits as a percentage of gross domestic product are on the decline in the world's advanced countries, despite their slow economic growth, the IMF said in its separate Fiscal Monitor report.

Advanced economy deficits will fall from an estimated 5.9 per cent of combined GDP in 2012 to a projected 4.7 per cent this year and 3.8 per cent in 2014. Growth in the same countries is on pace to repeat last year's 1.2 per cent.

The IMF sees emerging markets as enjoying steady growth above 5 per cent in 2012-14, while their government deficits hold steady at just over 2 per cent for the same period.

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Source: Copyright 2013 dpa Deutsche Presse-Agentur GmbH

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