Why balance of risks tends down!

Why balance of risks tends down

Why balance of risks tends down

All leading organizations foresee a lower than expected global growth rate in 2013.

The question on everyone’s mind should be why the balance of risks tends to the downside, meaning the actual growth rates might be even lower.

Several factors may impair the growth rate of the global economy in 2013 and endanger the leading organizations’ forecasts in the coming year, including the following:

Uncertainty regarding politicians’ actions

Governments around the world, especially in Europe, have taken action for the sake of the stabilization of financial markets.

After world’s central banks have provided some kind of “safety cushion” for investors, its time the governments will start implementing pragmatic decisions which should lead to the stabilization of global economy.

In this context, we note the IMF’s words that “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 current slowdown has a more lasting component”.

According to IMF’s economists, the answer to that depends on how policy makers in Europe and the U.S. will deal with their short-term economic challenges.

The fiscal multiplier and governments’ austerity policies

Most developed countries governments (excluding Japan) committed to take budgetary austerity measures, which are expected to hit global growth.

That is even when taking into account that the planned tax hikes and the budget cuts in the U.S. (fiscal cliff), scheduled to the beginning of 2013, will be delayed.

The fiscal multiplier is a measure of how changes in the fiscal policy (such as spending and taxation) would affect growth.

According to recent calculations conducted by economists at the IMF, it currently stands at 1-1.5, meaning austerity measures that amount of 1% of GDP, derogate about 1.0%-1.5% of that country’s GDP.

In addition, the IMF estimates that austerity measures in the G-20 economies in next two years will exceed those recorded at 2012.

Further decline in household and companies leverage

Firms and companies in the financial sector will be another obstacle for the growth of global economy.

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