THE INTERNATIONAL Monetary Fund (IMF) has warned that the slowdown in the world economy will deepen if policymakers in the US and Europe cannot quickly resolve their economic problems. In the US, where the political system has been paralysed for months, tough decisions on fiscal policy have been deferred until after next month’s presidential election.
In Europe, the struggle to find a convincing solution to the sovereign debt crisis continues to make slow progress. Two steps forward are quickly followed by one step backward – the recent statement by the finance ministers of Germany, the Netherlands and Finland on legacy bank debt serves as the latest example.
For Ireland, perhaps the only small consolation in the IMF’s latest report on global economic prospects is the relatively benign growth outlook for the domestic economy; better at least than any of the other euro zone countries that are in bailout situations, and better too than the euro zone average. Where Greece’s economy will contract by 6 per cent of GDP this year and the euro zone by 0.4 per cent, the IMF forecasts the Irish economy will grow by 0.4 per cent and is credited with making a “bumpy recovery”.
Whether that fragile recovery can be sustained, and whether forecast growth of 1.4 per cent of GDP materialises in 2013, will depend greatly on the success or failure of the US and Europe in tackling their respective challenges. The US is facing a “fiscal cliff”, involving major spending cuts and tax increases from January 2nd, unless the new president and Congress agree on budget measures. If they fail to avert the fiscal crisis, the US economy will probably enter recession, with a negative impact on the global economy, given the strong trading ties that bind developed and developing economies.
Likewise, global growth prospects are imperilled by the continued impasse on euro zone debt relief. The sustained uncertainty about the resolution of both these crises – in the US and Europe – has had a large economic cost. It has depressed investment and lowered consumption as business and consumers, fearful of an uncertain future, remain reluctant to invest and spend, and have been more inclined to save. The very high level of household debt, and the prospect of a further €3.5 billion in spending cuts and tax rises in December’s budget, mean domestic demand will remain depressed. More than ever the Irish economy remains dependent on export-led growth for economic recovery.
Nevertheless in what has been a difficult and painful fiscal adjustment since the onset of the financial crisis, the IMF does point to one major success: the degree to which the austerity measures adopted by successive governments have ensured that social cohesion and solidarity have been maintained. As the IMF report points out: “Ireland’s strong social support system has cushioned the impact of the crisis on its at-risk-of-poverty indicators compared to the rest of Europe.” Moreover, in 2010 Ireland’s at-risk-of-poverty gap was the second lowest in Europe. In a report on the global economy, that offers some grounds for optimism.