Social Network

Economy

Why IMF is wrong about the world economy?  Argentina and Turkey

  In the recent World Economic Outlook, the IMF correctly notes that last year’s synchronized global economic upswing has now…

Why IMF is wrong about the world economy?  Argentina and Turkey

 

In the recent World Economic Outlook, the IMF correctly notes that last year’s synchronized global economic upswing has now given way to a synchronized global economic slowdown. Yet, optimistically the IMF expects that world economic growth will pick up in the second half of the year.  Recently, IMF reports have displayed a decidedly schizophrenic tendency, warning about risks on one hand, dismissing them on the other in their base-case scenario. The new argument about the world economy arriving at a delicate juncture, yet at the same time recovering in the second half of the year is a case in point.  The rebound is partly predicated on an absurd notion:  Desmond  Lachman of American Enterprise Institute  writes:  After highlighting the many downside risks to its forecast, the IMF notes that it is predicating its forecast of a world economic pickup on a rebound in the emerging market and developing economies. Specifically, it is relying on an expected rebound in growth in Argentina and Turkey and some improvement in a set of other stressed developing economies.

 

 

The notion of Argentina or Turkey ever exiting recession is truly  laughable.  Argentina is once again experiencing a currency attack, which is certain to kill all hopes of an economic upswing, while in Turkey political  uncertainty about Istanbul re-elections and the S-400 conflict with US-NATO has killed consumer sentiment, which is the locomotive of the economy.

 

Lachman comments:  There would seem to be two basic reasons to take with a pinch of salt the IMF’s expectation of a pick-up in world economic growth later this year based on a rebound in Argentina and Turkey.

 

The first is that the Argentine and Turkish economies are far too small to have any material impact on global economic growth. With a combined GDP of barely US $1 trillion, together they account for less than 1 ¼ percent of world GDP. As such, even if both those economies were to miraculously grow by 10% over the next year, they would add only 0.1% to world economic growth.

 

The second and more substantive reason for doubt is that there is every reason to think that far from rebounding, the economic slumps in Argentina and Turkey will deepen over the remainder of this year.

 

Over the past year Argentina has experienced a deep economic recession as a result of a plunging currency that has forced the Argentine central bank to maintain interest rates in excess of 60%. Despite sky high interest rates, since the start of this year, the Argentine peso has lost a further 16% in value taking its cumulative loss over the past year to more than 50%. This has been an important factor in an acceleration in Argentine inflation to around 50%.

 

Sadly, with an Argentine presidential election scheduled for October and with President Macri’s poll ratings plunging along with the economy, there is every prospect that Argentine currency weakness will persist in the remainder of this year. That could turn out to be a major drag on the economy.

 

Renewed currency weakness in Turkey following President Erdogan’s recent major setback in local elections would suggest that Turkey’s economic recession could deepen as well in the months ahead. This would seem to be especially the case considering Turkey’s worsening relations with the United States that would seem to preclude a much needed IMF stabilization program. It would also seem to be the case considering the start of a wave of defaults in the Turkish corporate sector, which has borrowed excessively in US dollar-denominated terms.

 

 

It is certainly true that the world economy will accelerate in the second half of the year, but on thanks to the likes of Argentina or Turkey.  It will  be the strength of consumer demand in US and the cleverness of the mandarins in Beijing that will carry the day.

Banner

Related News

Related News