The chattering classes are moaning today about the world economy. The IMF has reduced its economic forecast yet again, lowering growth projections across the board in its World Economic Outlook. Altogether, global GDP is projected to grow 3.3 percent in 2012, down from a July estimate of 3.5 percent. The FT explains the IMF’s reasons for the downgrade:
The euro crisis has not receded in line with the IMF’s projections, upsetting growth forecasts and leaving significant risks hanging over the world economy. Meanwhile, even the emerging economies, the engine of global growth, aren’t doing as well as had been predicted – partly because of domestic constraints and mounting financial imbalances. All in all, not a pretty picture, even when viewed from São Paulo or Beijing, let alone Brussels or Madrid.
But the IMF isn’t just ratcheting down growth forecasts; it thinks the chances of another global recession have grown. The mess in Europe, the fiscal cliff in the United States, the increasingly problematic situation in China, India’s slowdown and the stagnation in Brazil: the wise men at the IMF scan the skies, but they can’t find a star worth following.The IMF never had a lot of faith in politicians; now it’s losing faith in the world’s central banks. The Fed and the ECB have been widely hailed for actions that ostensibly saved the Atlantic economies, but the IMF seems to think that the magic might not last.Many investors seem to be treading water these days—and enjoying the process. Central bank policy is keeping interest rates for the well connected and the well heeled laughably low, even as the flood of paper liquidity and artificially depressed prices on government debt push money into the equity markets. There are lots of ways that sophisticated investors can turn these policies to their very considerable advantage, even as the little people face minuscule interest rates on the kinds of bonds and CDs on which senior citizens traditionally rely. Small businesses and ordinary households can’t get access to credit, and as the overreaction to the excesses of the housing bubble continues, millions of Americans can’t get mortgages despite current cheap rates.It is a perfect world for billionaires, a tough one for everyone else, and a very odd environment to have been created by a President running for re-election as a populist. But, as the IMF is warning, these policies aren’t leading back toward sustainable growth, and the current policy mix can’t go on indefinitely. Something is going to happen to change this picture at some point, and the IMF is increasingly worried that that something won’t be nice.