Weak performance in emerging economies is causing a world economic slowdown this year, but the advanced economies should step it up next year.
THE IMF recently lowered its forecast for growth in the world economy in 2013 to 2.9 per cent – 0.3 per cent points less than its previous forecast in July and the fourth time this year it has lowered its projections.
The downward revisions come almost entirely from emerging markets, notably India, where the IMF now expects an expansion of just 3.8 per cent. China's expansion has also slowed, with growth expected to be 7.6 per cent this year. A third notable downgrade is Mexico, which had its forecast cut by 1.7 percentage points.
Although the IMF notes that advanced economies are gradually strengthening, it actually forecasts them slowing in 2013 compared to 2012, before picking up in 2014. The reasons for the forecast recovery have to do with private sector recovery in the US, 'Abenomics' in
Japan, and some strengthening of core eurozone economies.
Obviously, a risk to this recovery that has come to the fore recently is the partisan fighting over fiscal policy in the US. The recent agreement to end the partial government shutdown and lift the debt ceiling into early 2014 takes away the immediate risk of a fiscal crunch and sovereign debt default, but more budget crises are possible next year after the government's funding and borrowing authority run out.
All up, the IMF expects a second successive year of slowdown for the world economy in 2013, before an acceleration next year to 3.6 per cent.
Two countries that have attracted interest from Australian businesses and investors face a varied outlook.
Like Australia, PNG is facing economic uncertainty as its resource investment boom winds down.
An IMF mission visiting Port Moresby last month forecast GDP to grow by about 5.5 per cent in 2013 and 5.75 per cent in 2014. Though these numbers are virtually the same, the IMF noted that the composition of the growth would change significantly.
Whereas in 2013 it will be investment-led, in 2014 exports will be the driver, as construction of the PNG LNG project winds down and exports from the project ramp up. In line with this switch, the external current account deficit is projected to narrow rapidly and turn into a surplus by 2015 as LNG exports reach full capacity.
In Mongolia, expansionary macroeconomic policies are buoying growth in the face of a slowdown in coal exports and foreign investment, but at the expense of balance of payments strains.
The economy expanded by 12.5 per cent in 2012 and 11.5 per cent in the first half of 2013, according to an IMF mission visiting Mongolia. Dragging growth down was a marked slowdown in coal exports and foreign-financed mining investment, but buoying it was strong farm output after a mild winter and expansionary fiscal and monetary policies.
The IMF noted that the expansionary policies were placing strains on the balance of payments and creating inflation risks. It warned that if the Mongolian government didn't tighten fiscal and monetary policies, the country would become more vulnerable to external shocks, particularly from China as it underwent a
structural slowdown and attempted to rebalance its growth from investment to consumption.
Though two-way trade between Mongolia and Australia is modest, Australia has significant and growing commercial interests in Mongolia.