By: Dr. Mike Campbell
The International Monetary Fund (IMF) has been polishing its crystal ball and has come up with some largely upbeat predictions about recovery of the global economy on the back of a better start to 2012 than many had feared. Major steps in the right direction have been identified as the decline in US unemployment to 8.2% (still an historically high level) and the plugging of the European sovereign debt crisis- for the time being anyway.
The IMF has adjusted its outlook for growth in the global economy and now suggests that it will see growth of 3.5% rather than 3.3% - not a vast improvement, but a step in the right direction, at least. It is predicting better growth in the UK, revising its forecast up to 0.8% from 0.2% and that UK inflation will fall to its target level of 2%; this could give the Bank of England more room for manoeuvre: "In the United Kingdom, with inflation expected to fall below the 2% target amid weaker growth and commodity prices, the Bank of England can further ease its monetary policy stance".
It suggests that contraction in the Eurozone will be less than previously expected with the bloc of 17 nations seeing a contraction of 0.3% rather than the 0.5% level initially predicted. It did revise the fortunes of Spain down, though, and is anticipating that the Spanish economy will shrink by 1.8% instead of 1.6%.
The IMF cautioned that although the sovereign debt crisis in Europe had been calmed when Greece was granted its second bailout, "risk of another crisis is still very much present". Spain will have a critical bond auction this week and yields seem to be edging up which could spark a further attack on the Euro if speculators believe that a Spanish bailout is looking inevitable.
The IMF also hinted strongly that some nations need to relax their austerity measures to foster growth and suggested that taxes could be temporarily raised to help to maintain fiscal progress (nations can decrease deficits either through spending cuts or by pushing up taxes to increase revenue flow into state coffers).