Growth forecasts for 2013

For the last review of 2012, we will present the economic growth forecasts for 2013 by leading institutions. Generally, the latest forecasts present a gloomier picture of global economy than ones from prior months do. Worldwide economic situation does not seem to get any better as, per IMF, "prospects have deteriorated further and risks increased".

• IMF: the International Monetary Fund global growth forecast for 2013 was revised downwards to 3.6%. IMF’s Chief Economist, Olivier Blanchard, said in the annual IMF World Bank meeting in Tokyo: “Low growth and uncertainty in advanced economies are affecting emerging market and developing economies through both trade and financial channels, adding to homegrown weaknesses”. Note that the IMF emphasized that its forecast was dependent on two crucial policy assumptions, that European leaders will get the Eurozone crisis under control and finding a solution for the fiscal cliff by the end of the year. A failure in achieving one of the above would lead the actual growth to be much lower.
• OECD: the Organisation for Economic Co-operation and Development cut its growth forecast for 2013 (for the 34 member countries’ economies) from the 2.2% forecast in May to 1.4%.  Pier Carlo Padoan, OECD chief economist, warned that the risk of a serious global recession cannot be ruled out: “Over the recent past, signs of emergence from the crisis have more than once given way to a renewed slowdown or even a double-dip recession in some countries”.
• ECB: the European central bank cut its growth forecast for 2013 to -0.3%, (compared to the September +0.5% forecast), following a growth forecast of -0.5% in 2012. The ECB president, Mario Draghi, said that weak Eurozone activity is expected to continue into next year, as leading economic indicators reflect the weakness of European economy. At the same breath, Draghi provided a more optimistic outlook, saying that a gradual recovery should start later in 2013, due to the expected increase in global demand and the positive effects of low interest rates in European economy.

Why balance of risks tends down

All leading organizations foresee a lower than expected global growth rate in 2013. The question on everyone’s mind should be why the balance of risks tends to the downside, meaning the actual growth rates might be even lower. Several factors may impair the growth rate of the global economy in 2013 and endanger the leading organizations' forecasts in the coming year, including the following:

• Uncertainty regarding politicians' actions: governments around the world, especially in Europe, have taken action for the sake of the stabilization of financial markets. After world's central banks have provided some kind of "safety cushion" for investors, its time the governments will start implementing pragmatic decisions which should lead to the stabilization of global economy. In this context, we note the IMF's words that "A key issue is whether the global economy is just hitting another bout of turbulence in what was always expected to be a slow and bumpy recovery or whether the current slowdown has a more lasting component". According to IMF's economists, the answer to that depends on how policy makers in Europe and the U.S. will deal with their short-term economic challenges.
• The fiscal multiplier and governments' austerity policies: most developed countries governments (excluding Japan) committed to take budgetary austerity measures, which are expected to hit global growth. That is even when taking into account that the planned tax hikes and the budget cuts in the U.S. (fiscal cliff), scheduled to the beginning of 2013, will be delayed. The fiscal multiplier is a measure of how changes in the fiscal policy (such as spending and taxation) would affect growth. According to recent calculations conducted by economists at the IMF, it currently stands at 1-1.5, meaning austerity measures that amount of 1% of GDP, derogate about 1.0%-1.5% of that country's GDP. In addition, the IMF estimates that austerity measures in the G-20 economies in next two years will exceed those recorded at 2012.
• Further decline in household and companies leverage: firms and companies in the financial sector will be another obstacle for the growth of global economy.

Two main austerity measures approaches

There are two ways to approach the economic policy:

• The Keynesian approach wishes to increase public spending by increasing the deficit during recessions, in order to stimulate the economy. To encourage public spending the government would usually reduce taxes.
• The non-Keynesian approach argues that the most important step for future growth would be to reduce the government's debt by tough austerity steps in order to reduce debt yields in the financial markets and make it easier for the country to raise more debt since Lower bond yields reduce the cost of borrowing.

Which approach is better for managing the debts crisis? The new Japanese government's approach is based on opposite principles than those applied by European politicians (led by Germany) in their struggle against the debt crisis, a very expansionary fiscal policy in Japan compared with the strict austerity policy in Europe. It will be interesting to examine the results of Japan's new economic experiment against Europe's old one which hasn’t yet been proved successful.

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