Business World, 10 October 2012


The International Monetary Fund (IMF) announced that it is cutting its global economic forecasts once more. The IMF called the risks of a slowdown “alarmingly high,” primarily because of policy uncertainty in the United States and Europe. The IMF staff’s Global Projection Model (GPM) estimates suggest, that in 2013, recession probabilities are about 15% in the United States, above 25% in Japan, and above 80% in the euro area.

IMF foresees global growth of 3.3% in 2012 and 3.6% in 2013, down from 3.5% this year and 3.9% next year when it made its last report in July. Several factors continue to dampen growth in high-income countries: financial market stress, government spending cuts, stubbornly high unemployment and political uncertainty.

IMF forecasts that advanced economies, including the United States and Germany, would grow about 1.3% this year, down from 3% in 2010. But it does not expect growth to pick up much next year. It forecasts growth of just 1.5% in advanced economies.

But the IMF warned that even these numbers may be over optimistic. These revised forecasts are based on the assumption that policy makers in Europe and the United States would be able to agree to carry out pro-growth policies.

Christine Lagarde, IMF’s managing director, has stern words for US authorities. After the presidential and congressional elections in November, whoever wins the elections, should have to avoid the “fiscal cliff,” a mix of tax increases and government spending cuts that could cause the economy back into recession. “It’s not a threat just for the United States of America, it’s a threat for the global economy,” Lagarde said.

Countries such as China and India, both sources of strong growth during much of the recovery from the global recession, have started to decelerate. The Fund reduced a full percentage point off its 2012 growth estimate for Brazil, and 1.3 percentage points off its growth estimate for India.


But there’s another storm brewing in this part of the world. Japan’s decision to buy contested islands in the East Asia Sea angered China, resulting in violent demonstrations and a boycott of car and other brands made in, or by, Japan.

As a result, Japanese car sales in China last September plummeted. Year-on-year, car sales for Mitsubishi fell 63%: Toyota, -49%; Suzuki, -43%; Honda, -41%; Nissan, -35%; and Mazda, -35%. This could lead to prolonged production cuts and job cuts in car makers’ plants in China.

This is bad news for both slowing China and struggling Japan. No one knows when and how this boycott will be resolved. But the distaste of anything Japanese may be long-lived. Owning and driving cars made in Japan has become dangerous, while alternatives, even China-made cars, have emerged.

The economic woes of the world’s second (China) and third (Japan) biggest economies in the world could only compound the likelihood of another global economic recession within a span of five years.

With record high public debt in the developed world, and with many governments running out of conventional fiscal and monetary tools to address the crisis, another global recession is understandably more difficult to fix.


In the face of this looming global recession, policy makers have two options: prepare or procrastinate. Basking in the relatively strong first-half economic performance, the President Aquino and his economic managers may feel that there is no need to prepare for the difficult days ahead. That would be a serious mistake.

With the world economic prospect dimming, Philippine authorities should focus on developing the domestic economy. They have to accelerate the implementation of the government’s job-creating public infrastructure and low-cost housing projects. They should try to add more life to the stalled public-private partnership projects. They should ease up on politicking and should focus more on managing the economy.

The handwriting is on the wall. While both the World Bank (WB) and the Asian Development Bank (ADB) upgraded their GDP growth forecast for the Philippines — for the World Bank, to 5% from 4.6% and for the ADB to 5.5% from 4.8% — the outlook is negative. Both revisions simply recognized the strong first half economic performance.

The economic outlook for the Philippines is one of decelerating growth. The second quarter growth was lower than the first quarter growth. For the World Bank’s full year GDP growth of 5% to be achieved, the economy has to grow 3.9%, and for ADB’s full-year GDP growth of 5.5%, it has to grow 4.9%. Both second-half forecasts are lower than the government’s full year forecast of 5% to 6%.

The IMF chose not to change its GDP forecasts for the Philippines. It expected the Philippine economy to grow 4.8% this year and next, with next year’s forecast slightly less than the 4.9% growth announced last July. It’s low estimate of full year 4.8 percent growth implies that the economy will slow to 3.5% growth in the second half of the year.

Given this negative outlook for the second half of the year (WB’s GDP growth rate of 3.9%, ADB’s 4.9%, and IMF’s 3.5%), much remains to be done.