Thursday, August 20, 2009

IMF Offers The Answers, But Are Governments Willing To Ask The Right Questions?

IMF Offers The Answers, But Are Governments Willing To Ask The Right Questions?

By TradingHelpDesk on August 20, 2009 |

contentThe International Monetary Fund (IMF) has released an excellent report analysing the global economy and the recovery to-date. Also provided is a recommended action-list enabling central banks and governments to achieve sustainable growth going forward.

The report identified the current recession as being fundamentally different to “normal” recessions in its cause as well as the depth and length of the contraction. The consequences of the financial sector led recession will alter both demand and supply characteristics for years to come with western domiciled personal and corporate balance sheets damaged beyond easy repair. The usual ingredients for a recovery; lower interest rates and currency depreciation would be insufficient in isolation to create increased domestic demand and an improvement in the trade balance (higher exports). The IMF is clearly describing the US, and to a lesser degree the UK and Europe, in its analysis.

Post recession, the IMF suggest, the balance of economic power between the west and Asia could change permanently with the old model of western consumers borrowing to pay for Asian manufactured goods ceasing to exist as a primary tool for securing global growth.

The International Monetary Fund predicts sustainable global growth can only be achieved if developed economies increase their exports to Asia and other emerging regions. If however, Asia continues to feed the region’s fast growing consumption with domestic and regional output only, a two-speed global economic system would develop with Europe and the US experiencing sub-par growth for decades, with western domestic demand further damaged by stubbornly high unemployment and an inevitable increase in the tax burden required to fix government shortfalls in tax receipts versus public expenditure.

Interestingly, the IMF has put forward the very argument used by equity bears and cited the current recovery as being prompted by “fiscal stimulus and inventory rebuilding” rather than “strong private consumption and fixed investment spending”. The IMF highlighted the inevitable reversal of government stimulus as the vulnerable point in the recovery curve. If at that stage consumers and businesses do not pick up the spending baton, the recovery will fade and a double-dip recession will occur. This is a fairly obvious point and presumes pessimistically that confidence - the foundation of consumption and investment - could be absent whereas numerous surveys show consumer and business confidence is strengthening so in all likelihood the private sector will take the recovery further when government stimulus is withdrawn. Nevertheless, the IMF is accurate in its identification of the key risk, though that risk looks unlikely to materialize given ongoing consumer and business confidence data.

Reviewing western fiscal deficits in more depth, recent government efforts to rescue demand with stimulus were confirmed as necessary and welcomed. However, the IMF insisted the continued growth in fiscal deficits to be unsustainable and a plan for remedy, spending cuts and tax increases, should be clarified and introduced as soon as possible prevent a possible collapse in demand for government debt and a spike in interest rates (issuers would forced to offer higher returns to bond investors to compensate for a higher risk of default or currency devaluation). The IMF also advised that aging populations, and their effect of the ratio of tax revenues to benefits, were in fact a bigger danger to the fiscal stability of western governments than the financial crisis had proved to be. Their solution: To cut the “future growth” of entitlement programs in healthcare and retirement provision. Clearly, such a move would seriously jeopardize the re-election of any government that put-forward and executed such a policy.

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