This month’s issue of EFIC’s newsletter, World Risk Developments, discusses an interesting tension that has arisen in the world economic outlook. Many leading and coincident indicators of national and by extension world economic activity are delivering moderately pleasant surprises, prompting forecasters to upgrade their guesstimates of growth for 2010 and 2011. Yet at the same time, doubts about the ability of Greece, and to a lesser extent Portugal, Spain and Ireland, to finance their large budget deficits and public debts is casting a pall over the eurozone outlook, and again by extension the world outlook.
The newsletter notes that the latest prominent forecaster to revise up its numbers is the International Monetary Fund (IMF). It is now forecasting world GDP growth of 3.9% in 2010, up three-quarters of a percentage point from its October forecast. ‘Meanwhile, and astonishingly, however, sovereign CDS spreads for Greece have become larger than those for Russia, the Philippines and Indonesia’, says EFIC’s chief economist Roger Donnelly.
Still, any need for a bailout could unnerve financial markets and lead to renewed risk aversion, which would dampen confidence and ripple through to funding costs for a wide spectrum of borrowers in world capital and banking markets. Thus, the Greek difficulties could represent a renewed drag on world growth. That is the broader significance of Greece, Donnelly says.
