The IMF’s doom
September 22nd, 2011
The IMF has warned that the world economy is slowing down. Markets had worked that out a few weeks ago. Official confirmation adds a little to the gloom.
The IMF has also carried out a study of public sector indebtedness and the progress or lack of it being made to get deficits down. It is important reading for investors.
The IMF confirms that the developing world is on the whole in better shape than the advanced world. It shows that the Eurozone countries are doing better at deficit control than the US, UK and Japan. The IMF asks the question can the very low rates of interest that the USA, UK and Japan currently enjoy carry on against the background of such heavy borrowing. The IMF is too careful to say they cannot, but clearly wants the question posed.
The figures are interesting:
IMF fiscal balances as % of GDP
| Country | 2010 | 2011 | 2012 |
| US | -10.3 | -9.6 | -7.9 |
| UK | -10.2 | -8.5 | -7.0 |
| Spain | -9.2 | -6.1 | -5.2 |
| Italy | -4.5 | -4.0 | -2.4 |
| Germany | -3.3 | -1.7 | -1.1 |
Source: IMF, World Economic Outlook: Slowing Growth, Rising Risks
The Euroland figures cause problems partly owing to the structure of the single currency, and partly owing to fears of poor growth performances from the weaker countries. The US and Japan have additional problems stemming from the need to roll over large amounts of maturing debt. This seems to be offset by the willingness of Japanese savers to finance their government’s excess spending at low interest rates. There is little foreign ownership of Japanese bonds. In the US the Fed has come to the aid of the funding party with big purchases, and domestic demand too has been good. The UK has less of a roll over problem, but has more foreign owners of its debt.
The sad truth facing investors remains that many countries in the west are heavily in debt, their debt is still growing quickly, and slower growth makes the problem worse. The IMF will try to keep the feet of their politicians to the flames of deficit reduction, but even they waver in their immediate resolve when they see economies slowing too much. The Fund’s Report confirms our fears both about growth rates and debt build in many of the leading advanced economies. It is a negative background for equity investment. It is a two tier government bond market, where there could be some nasty surprises amongst the countries that currently qualify as good risks.
