IMF not as upbeat about Hungarian growth as government

“Global growth is in low gear, the drivers of activity are changing, and downside risks persist. China and a growing number of emerging market economies are coming off cyclical peaks. Their growth rates are projected to remain much above those of the advanced economies but below the elevated levels seen in recent years, for both cyclical and structural reasons. The United States has seen several quarters of solid private demand," the WEO says in its executive summary.

Although public sector demand has been pushing in the opposite direction, this counterforce will diminish in 2014, setting the stage for higher growth. Japan’s economy is enjoying a vigorous rebound but will lose steam in 2014 as fiscal policy tightens.

The IMF stressed that risks identified in recent World Economic Outlook (WEO) reports are still relevant: “the euro area could fall into stagnation; the recovery in Japan could falter in the absence of ambitious structural reforms and medium-term fiscal consolidation plans with specific measures; still weaker investment and potential output growth could result in less of a growth bounce-back in emerging markets."

The euro area is crawling out of recession, but activity is forecast to stay tepid. In these three advanced economies, much slack remains and inflation pressure is expected to stay subdued, it said.

These changing growth dynamics raise new policy challenges, and policy spillovers may pose greater concern. Two recent developments will likely shape the path of the global economy in the near term, the IMF added.

First, markets are increasingly convinced that U.S. monetary policy is reaching a turning point. Talk by the Federal Reserve about tapering its quantitative easing measures led to an unexpectedly large increase in long-term yields in the United States and many other economies, much of which has not been reversed despite a subsequent decision by the Federal Reserve to maintain the amount of asset purchases and policy actions in other countries.

Second, there is strengthening conviction that China will grow more slowly over the medium term than in the recent past--previous expectations that the Chinese authorities would react with a strong stimulus if output growth were to decline toward the government target of 7.5% have had to be revised, the IMF added.

The Fund expects global activity to strengthen moderately but warns that the risks to the forecast remain to the downside. The impulse is projected to come from the advanced economies, where output is expected to expand at a pace of about 2% in 2014, about 0.75 percentage point more than in 2013.

Growth in the euro area will be held back by the very weak economies in the periphery, the Fund projects. Emerging market and developing economies are projected to expand by about 5% in 2014, as fiscal policy is forecast to stay broadly neutral and real interest rates to remain relatively low.

Some new downside risks have come to the fore, while old risks largely remain, the IMF said. Regarding the political standoff in the United States, which has led to a shutdown of its federal government, the IMF noted that its projections assume that “the shutdown is short, discretionary public spending is approved and executed as assumed in the forecast, and the debt ceiling--which may be reached by mid-October--is raised promptly."

It added, however, that there is uncertainty on all three accounts. “While the damage to the U.S. economy from a short shutdown is likely to be limited, a longer shutdown could be quite harmful. And, even more importantly, a failure to promptly raise the debt ceiling, leading to a U.S. selective default, could seriously damage the global economy."

“In this setting, emerging market economies may face exchange rate and financial market overshooting as they also cope with weaker economic outlooks and rising domestic vulnerabilities; some could even face severe balance of payments disruptions," the Fund warns.

The latest projections reveal that the IMF has revised its growth estimates downwardly for Hungary compared to a year ago. In its previous WEO it forecast 0.8% GDP growth for this year, whereas presently it sees economic output rising by merely 0.2%. This is an interesting estimate, as in order to meet it the Hungarian economy should be practically stagnant in the second quarter. The 2014 estimate is behind the cabinet’s own forecast of 2.0% at 1.3%. This is lower than the 2.75% average GDP growth projected for emerging Europe. The IMF lists Hungary among EM economies where recovery is about to start. This is not such a spending picture as the strong growth forecasted for the Baltic States, for instance, but definitely more reassuring than the further weakening projected for Poland.

“Southeastern Europe, which was affected by both a very cold winter and severe drought in summer 2012, is recovering this year; only Croatia will remain in a mild recession. Better weather will also help Hungary, although activity will be broadly flat this year, recovering by 1¥ percent in 2014," the IMF said.

“The balance of risks to the outlook is tilted to the downside. A more protracted recession in the euro area is a key risk, especially for countries with strong intra- European links (notably, Croatia, Hungary, Poland).

"Further deterioration in external financing conditions is another major concern, particularly for countries with relatively large fiscal or external imbalances or both, such as Turkey and Serbia. Prolonged financial market volatility could also constrain the funding of western banks’ regional subsidiaries," the IMF said.

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