IMF gives bleak assessment of stalled global recoveryTuesday 09 October 2012 17.54
Plagued by uncertainty and setbacks, the world economy has weakened further and will grow more slowly over the next year, the International Monetary Fund has said in its latest forecast.
Advanced economies are risking recession, the international lending organisation said in a quarterly update of its World Economic Outlook.
It added that the malaise is spreading to more dynamic emerging economies such as China.
The IMF forecasts that the world economy will expand 3.3% this year, down from the estimate of 3.5% in July.
The fund's forecast for growth in 2013 is 3.6%, down from 3.9% three months ago and 4.1% in April.
Underpinning that bleaker scenario are the assumptions that Europe will continue to ease monetary policy.
It also expects that the US will avert a crushing blow to growth by fending off a "fiscal cliff" that could result from a failure to reach a compromise on its budget law and tax cuts.
Conditions could worsen if the US does not deal with its budget crisis soon, the IMF said.
"Downside risks have increased and are considerable," the fund said in its report today.
The IMF has also admitted to getting it wrong on the effects that austerity would have on the Irish economy.
It said it did not believe tax hikes and cuts would have had such an adverse effect on jobs and spending.
The report shows that Ireland had the second highest austerity measures in the developed world in 2010 - Greece had the highest.
Today's IMF 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 euro zone country in a bailout situation.
But the forecasts are well below the Government's predictions and are slightly more pessimistic than previous IMF forecasts.
The IMF predicts that the Greek economy will slump by 6% this year, while the economy will slow by 3% in Portugal and by 2.3% in Italy. It has pencilled in 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 euro area periphery, which, despite some easing, did not fully reverse in the third quarter through mid-September.
It also warned that spillovers are increasingly reaching other economies in the euro zone due to strong trade and financial links.
IMF says forecasts based on 'critical policy action'
The Fund said its forecasts are based "on critical policy action in the euro area and the US, and it is very difficult to estimate the probability that this action will materialise."
The IMF has urged the US to raise the ceiling on the level of debt the government can issue, which is capped by law. In August 2011, a battle between the Obama administration and Congress over raising the limit was not resolved until the US almost defaulted on its debt.
Global efforts to ease credit and increase the amount of money available for lending are helping, but appear to be yielding diminishing returns, as are fiscal stimulus policies, the IMF warned.
"Because uncertainty is high, confidence is low, and financial sectors are weak, the significant fiscal achievements have been accompanied by disappointing growth or recessions," it said.
Among other things, it says governments need to do more to relieve the burden of household debt that is constraining spending power and thus crippling demand. While large corporations pay record low rates for credit, households and small companies struggle to obtain bank loans, it added.
Fortifying domestic demand is all the more crucial given weakening trade trends. The IMF forecasts that growth in world trade volume will slump to 3.2% this year from 5.8% last year and 12.6% in 2010.
"Low growth and uncertainty in advanced economies are affecting emerging market and developing economies through both trade and financial channels, adding to homegrown weaknesses," the IMF's chief economist, Olivier Blanchard, said in a statement.
But he told reporters that a more optimistic scenario was possible if the right measures are taken, such as fixing banks in European countries and reducing the uncertainty about US policies. "The case for an upside scenario is stronger than it has been," he said at the opening of the IMF meeting in Tokyo.
He noted some positive signs in the US economy such as a turnaround in the housing market. The IMF also sees the slowdown in China as part of a shift from the past double-digit growth to a rate that is "sustainable," a process he described as "a soft landing."
And the slowdown in developed nations had pushed down exports, the key factor behind the slowdown in China, Blanchard and other IMF officials said.
The IMF raised the US growth forecast slightly, to 2.2% this year from 2% in July. For 2013, though, it expects US growth of 2.1%, down from 2.3%.
Among the 17 nations that use the euro, low growth in the major "core economies," such as Germany and France, will be offset by outright contractions in the smaller economies, leading real gross domestic product to fall by about 0.4% in 2012, the IMF said.
It forecasts growth in the euro area will stay flat in the first half of 2013 and improve to about 1% in the second half of the year, the IMF said.
The report was released just ahead of the World Bank-IMF annual meeting, which is being held in Tokyo this week. The gathering of some 10,000 bankers, executives and officials will likely refocus attention on Japan's failure to escape its own economic slump two decades after its own financial implosion in the early 1990s.
The IMF said it expects growth in Japan to hit 2.2% this year but to slacken further as reconstruction from the March 2011 disasters winds down, falling to 1.2% in 2013. Japan, whose population is both shrinking and aging faster than elsewhere, is confronting problems of high debt and stagnation, it said.
As usual, the bright spots are developing economies that were less affected by the global financial crisis, where rising employment and strong demand will help support growth, the IMF said.
China's economy will likely expand by 7.8% this year, down from July's 8% forecast, though a pickup in construction projects is expected to spur growth late in the year. India's economy will grow 4.9%, down from 6.1%. Brazil's growth will be only 1.5%, compared to 2.5%.
The IMF advised policymakers to devise stronger medium-term fiscal and structural reforms to shore up confidence in the growth potential of the advanced economies. Only then, will investor confidence in markets and public debt be restored.
"Unless governments spell out how they intend to effect the necessary adjustment over the medium term, a cloud of uncertainty will continue to hang over the international economy, with downside risks for output and employment in the short term," it said.