IMF warns the global recession isn't over, will China meet the call?

The global economy is beginning to pull out of a recession but stabilization is uneven and the recovery is expected to be sluggish according to the latest IMF World Economic Outlook. World growth in 2009 is expected to fall by 2.6%. Economic growth during 2009–10 is now projected to be about ½ percentage points higher than projected in the April forecast reaching 2.5 percent in 2010.

The IMF asserts the global recession is not over, and the recovery is expected to be slow, as financial systems remain impaired, support from public policies will gradually diminish, and households in countries that suffered asset price busts will rebuild savings. Global trade will be unable to provide stimulus. World trade is expected to contract by 12% in 2009 with export volumes in the advanced economies falling by 15%.

In the UK GDP is expected to contract by -4.2% in 2009 with growth of 0.2% expected for 2010. The US economy will contract by -2.6% in 2009 rising by just under 1% in 2010. In the Euro area the slump will impact by -4.8% in 2009.

The recovery will be slow, built “brick by brick” but half a BRIC is the only contribution in the year. Russia and Brazil, will enjoy negative growth of -6.5% and -1.3% in 2009. Growth in China and India, the other half of the acronym, is expected to be 7.5% in China and 5.4% in India, rising to 8.5% and 6.5% respectively in 2010. Given China’s low propensity to import (net manufactures), domestic growth will provide little stimulus to world economic activity.

The IMF warns bank lending conditions are expected to remain tight and external financing  will be constrained. Commodity prices have rebounded ahead of the recovery reflecting market sentiment, US Dollar depreciation and market specifics, (including the strength of commodity demand in China presumably). Forward markets signal an oil price of $74.50 into 2010 but overall inflation expectations remain subdued.

The IMF is looking forward to world growth re-balanced. In countries such as the US and the UK, which have posted large current account deficits, a contraction of domestic demand and a shift from internal to external growth will be required. By implication, the reverse will be required in countries (such as China) that posted large current account surpluses.

Will China become the new engine of world trade and growth? A change in domestic demand conditions and import propensities, sucking in world manufactures, creating a trade deficit on which the Anglo Saxon economies can feed. Generating a Renminbi surplus across the Globe and the ideal conditions for a new world reserve currency as the  Triffin Paradox partially defines. China may be looking for an offset to the Dollar exposure. A new SDR (Standard mandarin Putonghua for Syndicated Dollar Risk) but it ain’t that keen to see the Renminbi assume the role just yet. World trade and growth will remain sluggish.

IMF - World Economic Outlook

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