G20

The Financial Minsiters and Central Bank Governors of the world's 20 largest economies must feel somewhat chuffed with themselves. After all, six years on from the worst financial crisis in living memory and the financial Armageddon followed by an economic meltdown hasn't materialised as some of the more bearish pundits predicted. The Euro has survived the crisis, the stock markets have not spun into a perpetual nose dive. On the contrary, stock markets keep breaking record highs, week after week. Moreover, there has been a flurry of International Public Offerings (IPOs), underscoring a buoyant stock market. Property prices in the world's largest cities keep heading north too and the luxury goods market, ranging from classic Ferraris, to designer handbags and top of the range jewellery, are booming. In fact everything seems just fine and dandy in the goldilocks economy.

So when the financial architects, the Financial Ministers and Central Bankers of the world's largest economies, descended on Cairns for a meeting this weekend, September 20-21 2014, they were probably expecting praise and a pat on the back from the International Monetary Fund (IMF), but that just didn't happen. Indeed, the latests IMF report was thin on praise and highlighted an unbalanced economic recovery, rising downside risks with old ones remaining and new risks emerging. The IMF report flagged up excessive risk-taking, which is leading to overinflated asset prices egged on by a prolonged period of low interest rates. The latest IMF report is in reality a warning to the financial community.

Nevertheless, the IMF report acknowledged that global economic activity has continued its momentum despite a weak start during the first quarter of 2014. The main drivers of growth have come from China and the the United States, albeit weaker than it was projected back in April by the World Economic Outlook (WEO). Global recovery sustained by loose monetary policy and moderating fiscal discipline is expected to continue along its trajectory of recovery, according to the IMF report. But the recovery is expected to moderate at a deccelerated pace and the economic imbalances are also likely to remain or even worsen in the months ahead, according to the report. New heightened geopolitical concerns,particularly the Ukrainian crisis and ongoing problems in Iraq were cited as likely to drag down the global recovery.

In some advanced economies the growth has been weaker than expected, particularly in the euro zone and Japan. In the second quarter of 2014 growth has rebounded in the United States, although weaker than expected. China has also been another growth story, for the same period, supported by accommodating fiscal and monetary policies. This has had a positive knock on effect in the Asian emerging economies. Meanwhile, in South America weaker than anticipated domestic demand is beginning to dampen many economies in the region. The IMF report also notes export growth regained momentum in both advanced and emerging markets in the second quarter of 2014, compared to the previous quarter.

Prospects are shifting in advanced economies, according to the report. For example, a surprising fall in US Gross Domestic Product (GDP) during the first quarter, has since been revised and growth appears to have rebounded sharply upwards in the second quarter of 2014. Improving United States GDP has been put down to an increase in fixed investments (physical assets such as machinery, land, buildings, installations, vehicles, or technology), improved private consumption and a growth in local and Federal Government spending, which has in turn created jobs. Although United States net exports and the sluggish housing market continues to provide some headwinds for the economy.

The IMF report cites that Euro economic activity has stalled in the second quarte. Weaker growth was recorded in the main economies, notably in Germany and Italy, where economic activity contracted, while in France activity remains stagnant.

With respect to Japan, growth experienced in the first quarter of 2014 spurred on by a pending rise in consumption tax(having the effect of raising consumption just prior the tax hike), had a temporary impact on economic activity in that same period. Growth in the Japanese second quarter was disappointing. However, there are positive signs of investment gaining momentum in the final quarter of 2014.

In emerging markets the recovery has been unbalanced. China's supportive economic policies. which stimulated infrastructure investment and private consumption resulted in faster economic growth in the first quarter. Additionally, Chinese exports during the same period also rebounded from the previous period. The IMF anticipates growth to continue in the final half of 2014.

In emerging Asia external demand has recovered, spurred on by a growth rebound in the United States and China. Domestic demand is expected to pick-up in Indonesia and Asia.

Growth in South America remains disappointing, particularly where activity contracted in the second quarter on falling investment and cooling consumption. Nevertheless, one bright spot in the region is Mexico with economic growth remaining in line with the United States rebound in economic activity.

Looking forward the IMF forecasts the economic recovery to regain some strength in the remainder of 2014 to 2015, but it is likely to be weaker than envisaged in early spring of 2014.

The key driving factors supporting the recovery remain in place in advanced economies, namely; loose monetary policy, fiscal consolidation (reduction in the underling deficit) and strengthening balance sheets. But despite this, global output is weaker than forecasted in April by the WEO, due to investment weakness. Furthermore, there are general concerns that the sluggish recovery in the euro zone might be stalling.

The IMF recommends macro-prudence policy to address the potential financial stability threats associated with too low for too long rates. Moreover, emerging markets should continue to prepare for the likelihood of tighter financial condition.

With respect to advanced economies in the eurozone, the IMF recommends those countries which have completed financial consolidation, such as Germany, to invest in infrastructure projects. On the other hand, in the weaker economies which are experiencing negative growth, the IMF advocates putting the brakes on austerity.