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IMF cuts global growth forecasts

Publication Date : 10-10-2012

 

The International Monetary Fund (IMF) yesterday presented a gloomier picture of the global economy than a few months ago, saying prospects have deteriorated further and risks increased.

In its World Economic Outlook, the IMF slashed its growth forecast for large parts of the world economy and warned of a full-blown global slump if policymakers in Europe or the US mishandle serious threats.

“Risks for recession in the advanced economies are alarmingly high. The intensity of the euro area crisis has not abated as assumed in previous projections,” it said.

The warning came from the Washington-based lender when it unveiled its outlook in Tokyo ahead of the IMF-World Bank 2012 Annual Meetings.

Overall, the lender's forecast for global growth was marked down to 3.3 per cent this year and a still sluggish 3.6 per cent in 2013.

The IMF said advanced economies are projected to grow by 1.3 per cent this year, compared with 1.6 per cent last year and 3.0 per cent in 2010, with public spending cutbacks and the still-weak financial system weighing on prospects.

Growth in emerging market and developing economies was marked down compared with forecasts in July and April to 5.3 per cent, against 6.2 per cent last year. Leading emerging markets such as China, India, Russia, and Brazil will all see slower growth.

Growth in the volume of world trade is projected to slump to 3.2 per cent this year from 5.8 per cent last year and 12.6 per cent in 2010.

In developing Asia, real GDP (gross domestic product) growth will average 6.7 per cent in 2012 and is forecast to accelerate at 7.25 per cent in the second half of 2012. The main driver will be China, where activity is expected to receive a boost from accelerated approval of public infrastructure projects.

China, the world's second largest economy, will also see its economy to grow 7.8 per cent this year and 8.2 per cent next year. India will grow by 4.9 per cent and 6 per cent in 2012 and 2013 respectively.

The IMF said the outlook for India is unusually uncertain: for 2012, with weak growth in the first half and a continued investment slowdown, real GDP growth is projected to be close to 5 per cent, but improvements in external conditions and confidence -- helped by a variety of reforms announced very recently -- are projected to raise the real GDP growth.

IMF Chief Economist Olivier Blanchard said the world economic recovery continues, but it has weakened further.

"In advanced economies, growth is now too low to make a substantial dent in unemployment, and in major emerging markets, growth, which had been strong earlier, has also decreased."

Blanchard said there are two forces -- fiscal consolidation and weak financial systems -- which continue to pull growth down.

"In most countries, fiscal consolidation is proceeding according to plan, and while consolidation is needed, there is no question that it is weighing on demand and, therefore, on output. And, the evidence increasingly suggests that in the current environment, the fiscal multipliers, the effect of fiscal consolidation on demand and output, are large."

"The financial system is still not functioning efficiently. In many countries, probably more so in Europe than either in the US or in Japan, banks are still weak, and their position is made worse by low growth. As a result, many borrowers still face tight borrowing conditions, decreasing their demand as well."

The forecast said that monetary policy in advanced economies was expected to remain supportive. Major central banks have recently launched new programs to buy bonds and keep interest rates low.

But the global financial system remains fragile and efforts in advanced economies to rein in budgetary spending, while necessary, have slowed a recovery.

The recovery is forecast to limp along in the major advanced economies, with growth remaining at a fairly healthy level in many emerging market and developing economies.

In the United States, growth will average 2.2 per cent this year. Real GDP is projected to expand by about 1.5 per cent during the second half of 2012, rising to 2.75 per cent later in 2013.

In the euro area, real GDP is projected to decline by 0.4 per cent in 2012 overall, about 0.75 per cent (on an annualised basis) during the second half of 2012.

With lower budget cuts and domestic and euro area, wide policies supporting a further improvement in financial conditions later in 2013, real GDP is projected to stay flat in the first half of 2013 and expand by about 1 per cent in the second half.

In Japan, growth is projected at 2.2 per cent in 2012. The pace of growth will diminish noticeably as post-earthquake reconstruction winds down. Real GDP is forecast to stagnate in the second half of 2012 and grow by about 1 per cent in the first half of 2013.

Thereafter, growth is expected to accelerate further.

At a separate press conference, Carlo Cottarelli, head of the IMF's Fiscal Affairs department, said in many advanced economies efforts to reduce debts and deficits will need to persist for many years for debt ratios to return to their pre-crisis levels.

“Efforts at controlling debt stocks are taking longer to yield results,” said Cottarelli after he produced the latest edition of the Fiscal Monitor report of the IMF.

“Debt reduction is taking longer than after previous recessions, mostly due to the magnitude of the recession and the sluggishness of the recovery afterward.”

In the report, the IMF observes that deficits are set to narrow in nearly all advanced economies in 2012 and 2013 even in the face of weak economic growth.

In about half of the advanced economies, cyclically adjusted fiscal deficits will be smaller next year than they were in 2007, before the start of the crisis.

 

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