In its latest World Economic Outlook (WEO) the IMF notes that strong policy actions by governments have stabilised the global economy and are supporting a tentative recovery, but clearly warns of major ongoing risks and advises against any premature withdrawal of economic stimulus.
The IMF has also upgraded its forecasts for Australian growth, confirming our economy has outperformed all advanced economies during the global recession, with stronger growth and lower debt and deficits than the major advanced economies.
According to the IMF, Australia will record modest growth of 0.7 per cent in 2009 and 2.0 per cent in 2010. This means Australia will be the only advanced economy to record positive growth in 2009, and compares to a collective contraction of 3.4 per cent for advanced economies in 2009.
The IMF has noted that the global economy has now resumed growth and has made modest upward revisions to its global growth forecasts from its estimates published in July. However the IMF is still expecting the global economy to contract over the 2009 calendar year - the first annual contraction since World War II.
The IMF expects the global economy to contract by 1.1 per cent in 2009, revised up from 1.4 per cent. It expects the global economy will then grow by 3.1 per cent in 2010, revised up from 2.5 per cent. These improved forecasts are dependent on the full implementation of announced stimulus measures.
However the recovery in the global economy is far from assured, with the effects of global recession sure to be felt for a long time to come. IMF Chief Economist Olivier Blanchard warns in the report that "complacency must be avoided", with the global recovery likely to be slow and unemployment continuing to rise for some time.
According to the report, significant downside risks to growth remain a concern, with the IMF strongly advising against premature exit from fiscal stimulus, warning that:
"[t]he main short-term risk is that the recovery will stall. Premature exit from accommodative monetary and fiscal policies seems a significant risk because the policy-induced rebound might be mistaken for the beginning of a strong recovery in private demand. In general, the fragile global economy still seems vulnerable to a range of shocks..."
The IMF advises that "it is still too early for policymakers to relax their efforts to restore financial sector health and support demand with expansionary macroeconomic policies" and that "fiscal stimulus needs to be sustained until the recovery is on a firm footing."
Importantly, the IMF now expects Australia's unemployment rate to peak at 7 per cent in 2010. This is lower than all but one of the major advanced economies and considerably lower than the 9.4 per cent unemployment rate forecast for major advanced economies as a whole.
According to the IMF, Australia will also have lower net debt than any of the major advanced economies in every year from now to 2014. The Budget forecast Australian Government net debt would peak at 13.8 per cent of GDP in 2013-14, which is dramatically lower than the 93.4 per cent of GDP expected for the major advanced economies in 2014.
The Government has already outlined a clear fiscal strategy to return the budget to surplus and reduce debt as the global economy recovers. This strategy has been strongly endorsed by the IMF in its recent Article IV report which also commended Australia for its "enviable fiscal position".
However the IMF has highlighted the considerable challenges ahead for the global economy. As the global policy support is gradually phased down over time and the inventory rebuilding progressively loses its momentum, private demand will need to gain momentum to sustain the recovery.
In its Global Financial Stability Report, released yesterday, the IMF also highlighted that financial systems still face major risks themselves and pose major risks to real economies. The IMF estimates that global bank write-downs could reach US$2.8 trillion, of which US$1.5 trillion have yet to be recognised.
At the recent Pittsburgh Summit, G20 Leaders agreed that while they had made significant progress in tackling the global recession, the process of repair and recovery has a long way to run. They rejected any premature withdrawal of stimulus and pledged to sustain policy responses until a durable global recovery is assured.
Today's report also highlights key medium-term challenges, such as reforming financial systems, boosting potential growth and rebalancing the patterns of global demand. It is in response to these challenges that G20 members recently agreed on its new Framework for Strong, Sustainable and Balanced Growth. Through this framework, members will work towards shared policy objectives by allowing their medium-term national policy frameworks to be assessed by other members.
At our next meeting in early November, G20 Finance Ministers are scheduled to launch this framework. Australia's active participation in the G20 — which was recently designated as the key forum for international economic cooperation — gives us an historic opportunity to play a role in tackling these crucial global issues.
1 October 2009