By: Dr. Mike Campbell
The International Monetary Fund (IMF) has adopted a more bullish stance about the prospects for growth of the global economy in 2010. The IMF has revised their growth estimate up by 0.5% to 4.5%. The increased optimism is based on stronger than expected growth in the early part of the year, led by robust economic activity in Asia. The developed world contributed a steady, but modest, component to global economic growth over the same time span.
The IMF sounded a cautious note about financial stability in the light of the on-going sovereign debt crisis, highlighting the potential for problems stemming from the usual suspects. It argued that governments need to tackle their debt problems, but cautioned that cutting expenditure too radically or too quickly could endanger the recovery. Of course, if the markets do not regain confidence in the ability of certain developed countries to meet their debt obligations, there is a risk of a cataclysmic failure. The challenge, therefore, seems to be for nations to formulate realistic debt reduction measures that are credible, yet not so severe that they risk harming recovery by driving down demand from the public sector.
The IMF suggested that the sovereign debt crisis may cause European banks to be more reluctant to lend to each other. This could cause a liquidity problem which may harm the recovery. However, in a separate development, confidence is being widely expressed that the 91 banks on the EU stress test list are likely to pass, suggesting that the sector is relatively healthy. The gradual recovery of the Euro against the Dollar and Sterling may be evidence that the markets have drawn their own conclusions about the risks associated with the sovereign debt crisis in Europe – or perhaps they have come to realise that they are left with a choice between the frying pan or the fire when considering the debt problems facing the world’s first and second economies.