Fariborz Moshirian

The IMF has downgraded the economic outlook for 2012 much more than expected, including the forecasts for Australia, as global financial turmoil in the US and Europe is starting to impact on the Asian economies.
The recent World Economic Outlook report released by the IMF states that ‘The global economy is in a dangerous new phase. Global activity has weakened and become more uneven, confidence has fallen sharply recently, and downside risks are growing’.

However the International Monetary Fund (IMF) may be too pessimistic in downgrading its growth forecasts for the Australian and global economy.

During the Global Financial Crisis, the G20 leaders’ summits were used to coordinate economic and financial issues amongst all member countries. However, despite some progress being made within the G20 framework, the progress has been disappointing. The current global financial turmoil requires a more coordinated effort between all G20 member countries, particularly the G2 – the US and China. However, the progress has been disappointing and the next leaders’ summit in November may be too late to muster the desperately needed coordinated approach for the current global financial turmoil.
The IMF has cut its Australian growth forecasts from 2% to 1.8% for 2011 and trimmed the growth forecast to 3.3% for 2012.

Every time we get the forecast from the IMF we need to be cautious. This is simply because the Reserve Bank and the Australian Treasury have more resources, and more insight about the Australian economy. We also need to look at the forecasts in a dynamic process rather than in a static environment, where for instance, in the next two to three years, we do not know the massive amount of demand which might come to Australia from China, India and other parts of Asia.
The IMF’s forecast for 2011 is now roughly in line with the Reserve Bank of Australia’s own forecast of 2%, however the IMF is now much more pessimistic about next year than the RBA, which has forecast above-trend growth of 4.5%, compared to the IMF at 3.3%.

We can trust IMF to the extent that their data and information that they are providing is reliable. Against that, I would probably say that the IMF forecast was probably a little bit too pessimistic. So my feeling would be that it’s likely to be somewhere in between. I think that at the end of the day all of this highlights that sooner or later the Government will have to announce a tougher stance in terms of the Budget, both in terms of either raising taxes or cutting spending.

The whole policy of IMF prior to the global financial crisis was to liberalise the market, particularly in emerging economies. Now they are still playing catch up, particularly with all the contagion in Europe. While we should be concerned about the position in Greece and Portugal, our investment banks are in a better position, and we have far less debt. It is unlikely that the contagion will have much impact, other than giving our share prices a rollercoaster ride. The IMF would like to see the US and Europe implement both a short term stimulus and have a plan for the long term budget balance. However, given the size of public debt, such a policy may not be easy to implement.

Fariborz Moshirian is a Professor of Finance at the Australian School of Business.