Economy Watch: IMF Scales Back World Growth Predictions

By Dees Stribling, Contributing Editor

The International Monetary Fund said on Monday in its most recent “World Economic Outlook” that it now expects the world economy to grow by 3.3 percent during 2012, down from its July prediction of 3.5 percent. As for 2013, the organization is predicting worldwide growth of 3.6 percent, a reduction from its July prediction of 3.9 percent.

The United States is expected to grow in 2012 by 2.2 percent, while the euro-zone is expected to contract by 0.4 percent. The IMF also adjusted growth forecasts downward for most developing nations, such as China, India and Brazil. But even those downgraded growth scenarios assume some kind of action on the part of the U.S. and the euro zone to deal with their immediate economic problems.

Namely, the United States is facing gnawing uncertainty with its upcoming fiscal cliff, and the euro-zone, though perhaps calm for the moment, has done little to deal with its underlying debt problems. “A key issue is whether the global economy is just hitting another bout of turbulence in what was always expected to be a slow and bumpy recovery, or whether the slowdown has a more lasting component,” the organization said in the report. Failure to act on pressing problems—such as the fiscal cliff or the euro—could presumably add a “lasting component” to the worldwide slowdown.

ESM becomes operational

Early in the morning on Monday (in North America), the European Stability Mechanism (ESM), so recently approved by the Constitutional Court in Germany, formally became active. The fund will have a lending capacity of about 500 billion euros ($648 billion) and is designed to bail out euro-using countries, though “bail out” isn’t a term officially associated with the fund.

Cash contributions of 80 billion euros form the backbone of the fund, with the balance of 420 billion euros coming in the form of “callable” capital that will enable the fund to borrow on worldwide financial markets at good rates. As soon as the EMS started operations, both Moody’s Investor Services and Fitch assigned it AAA ratings, though Moody’s outlook was “negative,” while Fitch’s was “stable.”

The zone’s 17 finance ministers must all agree on all major decisions involving fund, which presumably includes whom to bail out and how to time such a move. The ESM can, in theory, lend as much as 200 billion euros to a government in such dire straits that it can’t raise money in any other way. No one is quite sure yet how the new fund will work in practice, however, and it might take another euro-related crisis to find out. Considering the recent history of the euro, that might not be too long in coming.

BLS not BS

The Bureau of Labor Statistics household survey on the U.S. jobs market, which on Friday reported an unexpected drop in the national unemployment rate to 7.8 percent, also had the unexpected side effect of making revered business tycoon Jack Welch look like a fool when he tweeted dark suspicions that the numbers were cooked, an allegation few sober observers take seriously. But perhaps the former GE CEO had yet to appreciate that a hasty tweet travels a lot faster and further than ideas broached during a bull session among a few associates.

Wall Street had a moderately down day on Monday, with the Dow Jones Industrial Average losing 26.5 points, or 0.19 percent. The S&P 500 was off 0.35 percent and the Nasdaq lost 0.76 percent.