IMF warns of deepening global economic slowdown

Tuesday 09 October 2012 22.58
Olivier Blanchard announced the World Economic Outlook at a press conference in Tokyo
Olivier Blanchard announced the World Economic Outlook at a press conference in Tokyo

The International Monetary Fund has said the global economic slowdown is worsening as it cut its growth forecasts for the second time since April.

It has warned US and European policymakers that failure to resolve economic problems would prolong the downturn.

The IMF said global growth in advanced economies is too weak to bring down unemployment and what little momentum exists is coming primarily from central banks.

The warning is made in its World Economic Outlook, released ahead of its next twice-yearly meeting, which will be held in Tokyo later this week.

The report predicts that the Irish economy will grow by 0.4% this year and will achieve growth of 1.4% next year.

This is the best outlook for a eurozone country in a bailout situation.

The IMF says the Greek economy will slump by 6% this year, while growth will slow by 3% in Portugal and by 2.3% in Italy. It predicts a contraction of 1.5% for Spain.

“Except for Ireland, which is in a bumpy recovery, the recessions in the economies of the euro area periphery have been deeper, and recovery is generally expected to begin only in 2013, once adjustment moderates,” the IMF said.

It noted that there was a further escalation of financial stress during the second quarter in the so-called euro area periphery, which, despite some easing, did not fully reverse in the third quarter.

It warned that spillovers are increasingly reaching other economies in the eurozone due to strong trade and financial links.

The report noted: "A key issue is whether the global economy is just hitting another bout of turbulence in what was always expected to be a slow and bumpy recovery or whether the current slowdown has a more lasting component."

"The answer depends on whether European and US policymakers deal proactively with their major short-term economic challenges."

Ahead of the Tokyo meeting, policymakers have flagged the US "fiscal cliff" of government spending cuts and tax increases due to take effect early in 2013 in resolving the euro area's debt crisis as the top issues facing the global economy.

Europe's debt crisis is "a clear and present danger", Canadian Finance Minister Jim Flaherty said last week.

The IMF forecast in its latest health check on the world economy that global output in 2012 would grow just 3.3%, down from a July estimate of 3.5%.

That would make this the slowest year of growth since 2009, when the world was struggling to pull out of the global financial crisis.

It predicted only a modest pickup next year to 3.6%, below its July estimate of 3.9%.

It projected US growth would be a little more than 2% this year and next, but forecast a contraction in the euro area this year by 0.4% and modest growth in 2013 of 0.2%.

Emerging markets are still expected to grow four times as fast as advanced economies, but the IMF severely cut its estimates for India and Brazil, with the latter now seen growing slower than the United States this year.

It also cut its expectations for China in 2012 and 2013 but warned against being overly pessimistic about the prospects of these economies, which were major engines of growth in the global financial crisis.

IMF Chief Economist Olivier Blanchard said at a briefing, referring to China, India and Brazil: "Let me be clear. We do not see these developments as signs of a hard landing in any of these countries."