The IMF has updated its economic forecasts with a gloomier global outlook than the one it presented in April. Despite this, QNB Group notes that its outlook for the MENA region has improved sharply.
The IMF now expects the MENA region to grow at a rate of 5.5% in 2012, en-par with the average for emerging economies. This is up 1.3% on its April forecast of just 4.3%, and by far the largest positive revision for any region or country.
The IMF does not provide separate forecasts for most countries individually in quarterly updates to its World Economic Outlook. This makes it hard to see precisely which parts of the MENA region have driven the upwards revision. The IMF did, however, note that the boost was due in part to a rebound in economic activity in Libya and to generally higher oil production and domestic demand across the region.
In its April outlook, the IMF had forecast that Libya and Iraq would lead the region in 2012, achieving growth of 76% and 11% respectively. This is as a result of Libyan oil production returning to pre-war levels and Iraqi production rising as a result of investments by foreign oil companies. The IMF also forecasts strong growth of around 6% for most GCC countries. The regional average was dragged down by oil-importing countries, with growth rates forecast at around 2-3% for most countries, but with contraction in Yemen and Syria.
The stronger regional outlook in its July update is particularly striking given further deterioration in Syria since April, which is also having a negative economic impact on its neighbours. The IMF sees a much improved outlook in North Africa and the Gulf offsetting the problems in the Levant. According to QNB Group, expansionary spending plans in some countries’ budgets, including Qatar’s, have probably contributed to the IMF’s forecast of higher domestic demand.
By contrast, the outlook for overall global GDP was revised downwards by 0.1% to 3.5% growth in 2012 and by 0.2% to 3.9% growth in 2013. Growth in the first quarter of the year was actually stronger than expected, partly because of the stabilising effect on financial markets of over €1trn in cheap financing provided to Eurozone banks by the European Central Bank. However, the stabilisation was short lived, and increased market stress. Additionally, a slew of poor economic data has led to the downwards revisions.
The weaker outlook was pulled down particularly by India, which was revised down by 0.7%, and by Brazil and the UK, which were both revised down by 0.6%. Only a handful of countries saw upwards revision, notably Japan and Germany, both up by 0.4%.
Real GDP Growth Forecasts for 2012 (%)
Aside from the forecast revisions to baseline scenarios, the IMF also sees an increase in downside risks. The most immediate of these risks would be a failure by policymakers to sufficiently protect banks in the eurozone periphery, particularly Spain and Greece. The IMF urges the EU to move quickly towards a regional banking union to avert this risk.
A second risk with global implications would be a failure by US politicians to negotiate a revision to automatic tax rises and spending cuts that are due to come into effect in 2013. Bipartisan support for an amendment to fiscal legislation is needed to prevent some of these rises and cuts coming into effect. If this “fiscal cliff” is not averted, it could cut US GDP by up to 4% and plunge the world’s largest economy into recession. This would have serious global consequences, particularly given the weakness in Europe. However, it is widely expected that, given the seriousness of the problem, a political deal will be achieved to reduce the fiscal cliff, although probably not until the last minute.
Irrespective of the two major developed country challenges, there are also risks that growth rates could decline further in emerging market. The IMF warns that the strong performance of emerging markets over the last decade may have created over-optimism about their ongoing growth trajectories. In particularly, the IMF notes a tail risk of a hard landing in China if investment spending, the major contributor to growth, were to slow sharply.
If any of these risks were to materialise, then they could drag down growth rates in much of the MENA, particularly if they were to result in a sharp fall in oil prices. However, QNB Group notes that oil prices have remained buoyant even during recent periods of market fright in relation to Greece and Spain and, therefore, the downside risks in 2012 for the MENA region, and the GCC in particular, are not perceived as too serious.
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