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IMF head: The world economy will be better in 2013

The global economy faces fewer headwinds in 2013 compared with last year and will likely grow a modest 3.5%, IMF managing director Christine Lagarde has told participants at the 43rd World Economic Forum in Davos, Switzerland.

The forum wound up at the weekend after attracting hundreds of world political and business leaders.

Ms Lagarde describes the recovery as “fragile and timid” because the eurozone is prone to political crisis and slow decision-making processes.

“Some good policy decisions have been made in the various corners of the world, including by central banks,” she says. “In 2013, they have to keep the momentum.”

She urges decision makers to continue with steps toward a European banking union while also crediting the US with making significant progress on fiscal consolidation, an achievement she says has tended to be overlooked.

Bank of Canada governor Mark J. Carney echoes Ms Lagarde’s caution.

“There are still tail risks out there,” he warns, rejecting some claims made in Davos that these risks have been reduced or totally eliminated. While central bank action is crucial, he says, this needs to be reinforced at the national level on the fiscal and structural sides, “and neither of those agendas are anywhere being finished.”

Hopes for Japan, China
Still, there is a glimmer of hope in Japan, where the new government of Prime Minister Shinzo Abe has just unveiled a new economic policy that has been quickly dubbed “Abe-nomics”. Akira Amari, Minister for Economic Revitalisation and Minister for Economic and Fiscal Policy of Japan, describes the new tack as “a clear commitment to pro-growth policies”, designed to reverse Japan’s prolonged deflation and accelerate GDP growth.

China provides another bright spot.

“After seven quarters of slowing growth, the economy headed up in the last quarter,” says Yi Gang, deputy governor, People’s Bank of China. The economy will grow about 8% in 2013, he adds.

Domestic consumption is becoming a more important driver of growth as evidenced by the steady shrinking in the current account surplus, a trend encouraged by China’s macroeconomic policies.

Africa is the third bright spot. “The IMF has revised its outlook for the continent upwards to 5.7%,” notes Trevor Manuel, Minister of the National Planning Commission of South Africa.

The outlook for emerging markets and low-income countries is much higher, at 5.5%, than for the developed nations, at 1.5%. But any notion of a decoupling is misguided.

“We now live in a globalised world,” China's Mr Yi says. What happens in Europe and the United States will affect China, Asia, Africa and other economies.