The IMF has sharply marked down its forecast for world growth and it now expects a mild recession in the euro area. Naturally, weaker world growth will affect economic activity in Latin America and the Caribbean. Concretely, the Fund expects the world economy to grow by just 3¼ percent in 2012, ¾ percentage points lower than our September forecasts. In contrast, our forecast for the U.S. economy for 2012 is unchanged, as incoming data signal a stronger—but still sluggish—domestic recovery that will offset a weaker global environment. Commodity prices will be affected by ebbing global demand, with oil projected to fall about 5 percent and non-oil commodities about 14 percent.
Recent large equity sell-offs across Asia and safe haven flows into Japan illustrate perfectly the region’s vulnerabilities to further global shocks. While the region’s fundamentals—built up over the past decade—remain relatively strong, economic uncertainties in Europe and the United States pose large downside risks. The world economy has entered a dangerous new phase and, as the IMF’s Managing Director stated recently, “what makes the situation all the more urgent is that it has implications for every country.” Our Regional Economic Outlook for Asia and the Pacific emphasizes these risks, and stresses the need for policymakers to remain vigilant and nimble in this extraordinarily uncertain climate. The view from here in Tokyo—looking out at the region—may be more serene than the view from other advanced country capitals, but there are storm clouds on the horizon.