The latest World Economic Outlook released by the IMF on Wednesday was a bit of a sobering document.
Given that the IMF has been delivering pretty sober assessments for more than four years now, it's not that surprising.
This time the outlook also involved a bit of looking back at how good things were expected to be before the GFC/great recession hit, and how bad they were predicted to be once it did. What is striking is that for many countries and parts of the world, 2013 finds them in a worse position than where they were expected to be in April 2009 when the IMF issued its first bleak outlook after the tumult of the GFC.
So while there has been some joy in the UK because the IMF has revised its prediction for growth in 2013 from the meagre 0.7% expected in the April WEO up to 1.4%, it is worth remembering that back in April 2009 the IMF expected the UK to be growing about 2.8% by now. For the next three years it kept revising down that prediction. Only in the past year has the IMF been too pessimistic:
For Australia, the reverse is true. If we look at the predictions for GDP growth from 2007 onwards, the IMF in 2008, before the GFC hit, was rather buoyant about Australia's future. It expected by the end of 2013 Australia's economy would have grown 20% above where it was in 2007. When the GFC hit, the IMF got real gloomy and revised this down to a mere 9.2%. And yet on Wednesday the IMF reported Australia's economy growing by 16% since 2007.
In fact, if you look at a comparison of where the IMF expected advanced economies to be by 2014 when the GFC hit and where they are now, Australia has performed better than all but Singapore, Taiwan and Israel:
Countries like Korea and China have grown faster than Australia, but they were expected to do so. Back in April 2009 the IMF expected Australia, the US and Canada to get through the GFC with much the same growth, but only Australia performed above expectations.
So Australia has gone through the GFC much better than expected, but interestingly back in 2010 the IMF thought we would be in better shape than we are now. Moreover, the latest outlook has revised down the estimate for Australia's GDP growth in 2014 from its April estimate of 3.3% to 2.8%.
Similarly, it has changed its expectations of our unemployment. In April it thought unemployment in 2014 would reach 5.2%, now it says 6.0% is the more likely outcome. Treasurer Joe Hockey noted this increase, saying, "Worryingly, the IMF forecasts Australia's unemployment rate to rise from 5.6 per cent in 2013 to 6.0 per cent in 2014." As Michael Pascoe observed, however, the IMF's forecast on unemployment is actually rather more optimistic than that of the Treasury, which in the pre-election economic and fiscal outlook predicted unemployment to reach 6.25% by June 2014.
So there are ups and downs to the outlook, but there certainly are risks looking ahead. Rather as Australia's economy has experienced transition, so, too, has the world economy. The IMF notes that while most advanced economies are gradually strengthening, "at the same time growth in emerging market economies has slowed".
For Australia this slowing is particularly important. The report estimates that the slowdown of Chinese growth from an average of 10% during the previous decade to an average of 7.5% over the coming decade will reduce Australia's revenue in exports by about 3% of GDP over that time. This makes us second only to China's neighbour, Mongolia, in exposure to a Chinese slowdown.
And slow down China has. In the past three years the IMF has reduced its expectations for China's growth in 2014 from 9.5% to 8.5% to 7.3%. It now only predicts annual growth each year till 2018 to be 7.0%. How low is that? Well it hasn't been that low since 1990.
So the struggles lie ahead for Australia, and for those hoping relief might come from a lower dollar and a boost to our manufacturing sector, the news is not great either.
The IMF suggests the "US recovery is set to accelerate" – though this assumes "the shutdown is short, discretionary public spending is approved and executed as assumed in the forecast and the debt ceiling is raised promptly".
Even with these somewhat risky assumptions it predicts the US Federal Reserve will not raise interest rates until 2016.
And until that happens it is unlikely our dollar will fall to anywhere near the long-term average of 80 US cents.
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