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IMF raises recession risk

The International Monetary Fund (IMF) has warned that there is a one-in-six chance of a recession in many advanced economies, including Australia, if global growth falls below 2% next year.

Global growth has been revised down to 3.3% for 2012, and 3.6% for 2013, but is dependent on positive policy action in Europe and the United States. It expects policymakers in Europe are expected to take steps to ease financial conditions in struggling economies. In the US, the IMF has assumed that politicians will take action to avoid the so-called ‘fiscal cliff’, of automatic tax increases and spending cutbacks, which could push the US into recession.

While Australia is predicted to grow by 3.3% this year and 3% next year, a global recession could see further falls in commodity prices, falling terms of trade and an rise in unemployment. The good news is that the IMF has predicted that China will still be the fastest growing nation, expected to grow GDP by 7.8% in 2012 and rise to 8.2% in 2013.

Asian nations will still see some of the highest growth with India, Indonesia, Malaysia, Philippines, Thailand and Vietnam all expected to grow by around 5% this year and close to 6% next year. That could insulate Australia from the worst of the recession, if it comes to pass.

While falling commodity prices would have an impact on the value of our exports, miners including Rio Tinto Limited (ASX: RIO), Fortescue Metals Group (ASX: FMG), Atlas Iron (ASX: AGO) and BHP Billiton (ASX: BHP) have ramped up production volume, especially of iron ore. Increasing volumes of exports may alleviate falling prices somewhat, and could be assisted further, should the Australian dollar fall below parity with the US dollar. (That would mean Australian companies receive more Australian dollars for their sales of commodities, most of which are priced in US dollars).

The Foolish bottom line

This could all be a storm in a teacup, and while growth may slow, at least it’s not declining. There is a risk that we could be heading for a tough period ahead, but Australia looks much better placed to ride out the storm than many other countries.

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Motley Fool writer/analyst Mike King owns shares in BHP. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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