IMF World Economic Outlook says 'keep your chin up'
The global economy is in a scary place - you only need to look at how fast events have moved in Italy to see that.
Policymakers have a difficult, increasingly narrow, line to walk if they are to avoid something very bad happening. But for goodness sake, don't panic.
That, in effect, is the IMF's message to the world in its latest survey of the global economy.
The publication talks of a possible "lost decade" of growth in the advanced economies; of "sluggish growth in wages"; continued high unemployment; housing markets which fail to stabilise; and a "drastic" increase in financial volatility due to the eurozone crisis with threatens even the IMF's downbeat forecasts.
Countries like the US and UK have so far avoided these bond market pressures despite high levels of borrowing, but, say the authors, developments in Italy and Spain show that the mood in markets could turn against those countries too in a heartbeat.
Still, says the report, we should not be too disheartened.
Why? Because policymakers do, just, have it in their power to prevent the situation from becoming even worse. Also, we need to sound cheerful because - surprise surprise - confidence among businesses and consumers is a problem as well.
Confidence is key
OK, so the Fund doesn't make that last point, in so many words. But one of the key risks it identifies, especially in the US, is that consumers will look at the diminishing prospects they face and decide they need to save dramatically more.
If that happens, the report says we might seriously be facing a "lost decade". (In the US, of course, many would say they had already had one.)
So, governments must keep their chin up and talk about the decent recovery waiting just round the corner, if only they could grapple with the major challenges they face right now.
But the picture the report paints of the future - short and long term - is not exactly an inspiring one.
This seems especially true for the middle classes, whose benefits will need to be cut under the Fund's "strong policy action" scenario. This involves politicians making long term permanent cuts to entitlement programmes, including pensions, to free up room to give more support to the recovery in the short term.
Middle class jobs disappearing
There is a detailed analysis of the decline in the number of middle income and manufacturing jobs in the advanced economies over the past 20 years.
This trend has accelerated during the crisis and, the Fund says, is driven by increased imports from emerging markets as well as structural changes in technology.
In the US, employment in higher paid, higher skilled manufacturing jobs fell by 14% in the US between 2007 and 2009, while employment in services actually rose, by 2%. Employment fell by 2% overall.
The shift is less dramatic in Europe but it is happening there, too. As the Fund points out, productivity in services is generally lower, and grows more slowly, so this structural change could dampen the potential growth rate of these economies, not to mention the incomes of many workers, for many years to come. The authors don't offer many solutions, easy or otherwise, to this long term shadow hanging over a large part of the workforce.
Future unlike the past
The shorter term growth forecast has been cut for every country listed - with particularly large downward revisions for the US and Italy.
Among the major advanced economies, the IMF now thinks Germany will be the only country to grow by more than 2% in 2011. In 2012, none will grow that fast, except Japan, which will have seen its economy shrink this year due to the earthquake.
Those growth rates are not high enough to achieve any meaningful decline in unemployment or increase in real consumption or wages by 2013 - and the Fund does not expect any. It thinks that unemployment will stay near 9 per cent in the US, and it is not expected to fall in Europe either, including the UK.
Unemployment stays high
And yet, even this forecast explicitly assumes that (a) the crisis in the eurozone is controlled; (b) the US reaches a credible and economically sensible solution to it's fiscal challenges; and the volatility in financial markets does not go up.
In other words, even this downbeat forecast assumes that the next year looks nothing like the last one.
"Unless policies are strengthened", the report warns, "nothing beyond a weak and bumpy recovery is on the cards". But to the untrained eye, things look pretty weak and bumpy already.
We have seen, in recent months, the Fund dance around the "Plan B" issue in its commentary about the UK. The line has been that the policy was "appropriate" for now but might need to change if downside risks materialised and the recovery looked seriously weak.
This was usually said, while simultaneously presenting a new, somewhat lower, forecast for the UK.
Step closer to Plan B
In this report the Fund downgrades the UK forecast, again, and says the economy is "expected to struggle".
Its advice now is that if activity undershoots "current prospects", countries like the UK which face historically low government borrowing costs, "should also consider delaying some of their planned adjustment".
The way it is written, the authors of the report are talking about more than allowing the automatic stabilisers to operate in full, as the UK chancellor has already pledged.
Mr Osborne would be deciding to cut the structural deficit more slowly, not just allowing the overall deficit to overshoot, as a result of slow growth. (Though he would say his current plans allow room for that, too, for reasons I discussed in my last post.)
So, the Fund has moved one step closer to saying the downside scenario has arrived. But it has stopped short of saying it. And not just for the UK.
This is entirely understandable, at a time when confidence is at a premium, and politicians, especially in the eurozone, have important work to do if the more catastrophic scenarios around the euro are to be avoided.
But when the Fund says the "evidence points to continued, but uneven growth", that reassurance is starting to ring a little hollow.