It is astonishing that Standard & Poor’s can say anything about the best-known debt class in the world that is deemed to add value. This business is, after all, one of a class whose failures contributed mightily to the financial crisis. Nevertheless, the announcement that it was shifting its long-term rating on US federal debt from stable to negative reminded us all of something vital: the world economy is not on a stable path. On the contrary, to adopt a phrase often applied by the Chinese premier Wen Jiabao to his country, the world economy is “unsteady, unbalanced, uncoordinated and unsustainable”. The US fiscal position is just one of a number of risks – and far from the biggest.
This may not seem so clear from the forecasts in the latest World Economic Outlook of the International Monetary Fund. At the global level its forecasts are the same as in January: a healthy 4.4 per cent growth in 2011 and 4.5 per cent in 2012. Even at market exchange rates, growth is forecast at 3.5 per cent and 3.7 per cent, respectively. The volume of world trade is forecast to expand by 7.4 per cent this year and 6.9 per cent in 2012, after the post-crisis recovery of 12.4 per cent in 2010. Inflation, too, is forecast to be reasonably under control, with consumer prices rising 2.2 per cent in 2011 and 1.7 per cent in 2012 in advanced economies. Even in emerging countries inflation is forecast to fall from 6.9 per cent this year to 5.3 per cent in 2012.
The WEO also lays out the pattern of divergent growth. Advanced countries are forecast to experience