The IMF’s latest World Economic Outlook points to ongoing uncertainty in the global economy, particularly flowing from further turbulence in Europe, highlighting again the strength of the Australian economy relative to the rest of the developed world.
While global financial market turbulence eased in the early part of the year, financial market and sovereign stress in the euro area has intensified in recent months, with deep-seated weaknesses in Europe continuing to pose significant risks to the global recovery. The WEO notes:
“In the past three months, the global recovery, which was not strong to start with, has shown signs of further weakness. Financial market and sovereign stress in the euro area periphery have ratcheted up, close to end-2011 levels.”
Reflecting this, the IMF’s global growth projections have been lowered slightly over the forecast period. The IMF expects the global economy to grow by 3.5 per cent in 2012, broadly unchanged from its April WEO. The IMF has downgraded its global growth forecast for 2013 revised down slightly from 4.1 per cent to 3.9 per cent.
While the measures announced at the June EU leaders’ summit were encouraging, the IMF warns that delayed or insufficient policy action by European leaders still represents the biggest risk to the global outlook:
“The most immediate risk is still that delayed or insufficient policy action will further escalate the euro area crisis. In this regard, agreements reached at the EU leaders’ summit are steps in the right direction. But further steps are needed, notwithstanding high implementation hurdles, as underscored by the very recent deterioration in sovereign debt markets”
The IMF report is a reminder that it is critical European leaders quickly implement recent announcements, and make progress on a fiscal and banking union, as well as broader structural reforms to boost growth and competitiveness and restore fiscal sustainability.
The IMF also highlights the threat of an excessive fiscal tightening in the United States at the end of 2012, underscoring the need for US policymakers to achieve credible medium term fiscal consolidation while still supporting growth.
Global growth is expected to continue to be led by our region. While growth forecasts have been revised down slightly since the April WEO, developing Asia is expected to grow by 7.1 per cent in 2012 and 7.5 per cent in 2013, with China’s economy expected to grow by a robust 8.0 per cent in 2012 and 8.5 per cent in 2013. The IMF expects that growth in many emerging economies will be supported by the policy easing of recent months.
In my discussions in China over recent days, the strength of the Australian economy was raised time and again, and this IMF update is another timely reminder of how much stronger Australia’s economic fundamentals are compared with other advanced economies.
The Budget forecast for Australian economic growth (3¼ per cent in 2012-13 and 3 per cent in 2013-14) far exceeds the IMF’s forecasts for every single major advanced economy and the advanced economies as a whole (1.4 per cent in 2012 and 1.9 per cent in 2013).
Despite headwinds from ongoing global turbulence, the high dollar and structural changes underway, the Australian economy is in a league of its own. We have the best combination of impressive growth, low unemployment, a record investment pipeline, contained inflation, and low interest rates.
Australia also has strong public finances with a budget returning to surplus in 2012-13 ahead of every single major advanced economy. At its peak in 2011-12, Australia’s net debt is around one‑tenth of the average expected peak in net debt of the major advanced economies.
In the face of global headwinds, it is critical that we have the global economic architecture in place to support further progress on reforms to bolster growth.Australia continues to punch well above its weight in the global economy and have increased our role in global economic decision-making through the G20, with Australia set to take centre stage when Brisbane hosts the G20 Leaders’ Summit in 2014.