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The IMF’s crystal ball

April 23, 2009
“Financial conditions in the mature markets are projected to improve only slowly, as insolvency concerns are diminished by greater clarity over losses on bad assets and injections of public capital, and counterparty risks and market volatility are ...

Financial conditions in the mature markets are projected to improve only slowly, as insolvency concerns are diminished by greater clarity over losses on bad assets and injections of public capital, and counterparty risks and market volatility are reduced.” –IMF Chief Economist Olivier Blanchard

There are two ways to view the International Monetary Fund’s World Economic Outlook released yesterday in terms of freight.

One takes a decidedly gloomy view, as the IMF predicting global economic output to decline by 1.3 percent in 2009 – with “advanced economies” forecast to contract by 3.8 percent and the U.S. economy shrinking by 2.8 percent. Economic recovery should begin until 2010, but at a estimated 1.9 percent, it would be sluggish relative to past recoveries, noted Olivier Blanchard, the IMF’s chief economist.

“While the rate of contraction should moderate from the second quarter of 2009 onward, output per capita is projected to decline in countries representing three-quarters of the global economy,” he said at a press conference yesterday.

“The world economy was being battered by competing crosscurrents, with the collapse in confidence and demand continuing to pull the economy down and government stimulus measures and natural stabilization mechanisms pulling the economy up,” he added. “This is not the time for complacency, and the need for strong policies, both on the macro and especially on the financial fronts, is as acute as ever.”

From that perspective, freight volumes – both on a global basis and within the U.S. – are going to stay in the cellar for a long stretch here. When economic activity is negative on this scale – as it is now – freight simply evaporates, and we’ve got two and half quarters to go of an environment like this.

The second way to look at things, though, is to take a more positive view – one that Blanchard himself espoused at the IMF’s press conference yesterday. “There is light at the end of this long tunnel,” he said. “World growth can turn positive by the end of this year, and unemployment can start decreasing by the end of next year.”

Blanchard said he could see the balance shifting towards the end of this year, with growth in advanced countries becoming positive again in 2010, then returning to their normal level around the end of 2010. Unemployment should crest only toward the end of 2010, however, and should decrease after that.

The IMF’s outlook also noted that emerging and developing economies should still see positive growth this year of 1.6 percent, bouncing back to 4.0 percent next year. Sub-Saharan Africa will remain in positive territory at 1.7 percent in 2009, recovering to 3.9 percent next year. That activity should, in turn, fuel international trade and thus global freight volumes – potentially giving a lift to U.S. freight volumes as well.

Probably the best news is that the worst is most likely behind us. The IMF reported that advanced economies (that includes the U.S.) experienced an unprecedented 7½ percent decline in real GDP during the fourth quarter of last year, with output estimated to fall almost as fast during the first quarter of 2009.

Emerging economies, too, suffered badly and contracted 4 percent in the fourth quarter of 2008 in the aggregate, with the damage inflicted through both financial and trade channels, particularly to east Asian countries that rely heavily on manufacturing exports and the emerging European and Commonwealth of Independent States (CIS) economies, which have depended on strong capital inflows to fuel growth, the IMF noted.

Yet – as I noted before – that’s done with; over. The issue now is dealing effectively with the fallout of such a brutal economic collapse. And the way the IMF sees it, the critical element going forward is access to the “working capital” necessary for businesses to operate.

“Across the world, banks are limiting access to credit – and will continue to do so – as the overhang of bad assets and uncertainty about which institutions will remain solvent keep private capital on the sidelines,” the group said in its outlook. “Funding strains have spread well beyond short-term bank funding markets in advanced economies. Many nonfinancial corporations are unable to obtain working capital, and some are having difficulty raising longer-term debt.”

The broad retrenchment of foreign investors and banks from emerging economies and the resulting buildup in funding pressures are particularly worrisome, IMF’s Blanchard noted: as a result, new securities issues have come to a virtual stop, bank-related flows have been curtailed, bond spreads have soared, equity prices have dropped, and exchange markets have come under heavy pressure.

“Beyond a general rise in risk aversion, this reflects a range of adverse factors, including the damage done to advanced economy banks and hedge funds, the desire to move funds under the ‘umbrella’ provided by the increasing provision of guarantees in mature markets, and rising concerns about the economic prospects and vulnerabilities of emerging economies,” the IMF noted in its report.

The two biggest risks in all this, however, impact the global freight transportation industry the most – especially if “protectionism” rears its ugly head, the IMF said.

“This difficult and uncertain outlook argues for forceful action on both the financial and macroeconomic policy fronts,” the group noted in its outlook. “Past episodes of financial crisis have shown that delays in tackling the underlying problem mean an even more protracted economic downturn and even greater costs, both in terms of taxpayer money and economic activity.”

But policymakers must be mindful of the cross-border ramifications of policy choices, the IMF warned. “Initiatives that support trade and financial partners—including fiscal stimulus flows—will help support global demand, with shared benefits,” it said. “Conversely, a slide toward trade and financial protectionism would be hugely damaging to all, a clear warning from the experience of 1930s beggar-thy-neighbor policies.”

In the end, the IMF believes the greatest policy priority at this juncture is financial sector restructuring. “Convincing progress on this front is crucial for an economic recovery to take hold and would significantly enhance the effectiveness of monetary and fiscal stimulus,” the group stated.

So there you have it – predictions and suggestions from the IMF’s crystal ball. The key takeaway for U.S. truckers could be this: if the world’s nations make a concerted and coordinated effort to repair their financial sectors and do not engage in protectionist activity in terms of trade, the global economy should recover – albeit by next year, at a very slow pace.

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