IMF cuts global growth forecast

Last Updated: Tue, Oct 09, 2012 19:44 hrs

The International Monetary Fund is cutting its global economic forecasts yet again, calling the risks of a slowdown “alarmingly high,” primarily because of policy uncertainty in the United States and Europe.

It foresees global growth of 3.3 per cent in 2012 and 3.6 per cent in 2013, down from 3.5 per cent this year and 3.9 per cent next year when it made its last report in July. New estimates suggest a 15 per cent chance of recession in the United States next year, 25 per cent in Japan and above 80 per cent in the Euro area.

Financial market stress, government spending cuts, stubbornly high unemployment and political uncertainty continue to dampen growth in high-income countries, the fund said. At the same time, the emerging-market countries that fueled much of the recovery from the global recession, like China and India, have continued to cool off, with global trade slowing.

“The recovery has suffered new setbacks, and uncertainty weighs heavily on the outlook,” the fund said, warning that its forecasts might be overly optimistic if policy makers in Europe and the United States fail to carry out pro-growth policies. “Downside risks have increased and are considerable.”

The fund, which is based in Washington, will officially issue its report Tuesday at the start of a major meeting with the World Bank in Tokyo. The forecasts are part of the fund’s World Economic Outlook report, released four times a year.

The latest report focused on the higher-income countries whose political and economic troubles are posing significant risks to the rest of the world. The fund estimated that these advanced economies, including the United States and Germany, would grow about 1.3 per cent this year, down from 3 per cent in 2010.

The fund does not expect growth to pick up much next year, either, forecasting growth of just 1.5 per cent, in those countries.

“Low growth and uncertainty in advanced economies are affecting emerging market and developing economies through both trade and financial channels, adding to homegrown weaknesses,” Olivier Blanchard, the fund’s chief economist, said.

The fund has praised central banks for doing more to support the recovery in recent months. The European Central Bank, the United States Federal Reserve and the Bank of Japan have all enacted new policies to help economic growth and fight financial distress. That has helped to quiet the markets in Europe and bolster them elsewhere.

Still, political uncertainty and high unemployment have held the recovery back, the fund said. For Europe, the hard work of building a mechanism to aid countries having trouble accessing financing on the debt markets at reasonable rates and enacting new cross-Continent policies remains, the fund cautioned.

“The European Central Bank has recently done its part,” the fund said. “It is now up to national policy makers to move and activate the European Stability Mechanism, while articulating a credible path and beginning to implement measures to achieve a banking union and greater fiscal integration.”

The fund has also had stern words for the United States. After the presidential and Congressional elections next month, policy makers will have just weeks to avoid the “fiscal cliff,” a combination of tax increases and mandatory federal spending cuts that could throw the country back into recession — and drag down global growth with it.

“It’s not a threat just for the United States of America, it’s a threat for the global economy,” Christine Lagarde, the managing director of the fund, said last month in a speech at the Peterson Institute for International Economics in Washington.

“We all hope that despite political calendars, which anywhere in the world entail a degree of uncertainty and unpredictability, there will soon be enough political clarity and no political games in order to actually focus on removing this uncertainty,” she said.

In the economic forecast report, the fund also cut its growth estimates for emerging economies, whose strength has helped pull the world out of the global recession. It now foresees growth of 5.3 per cent this year and 5.6 per cent next year, down from its July estimates.

The fund knocked a full percentage point off its 2012 growth estimate for Brazil, and 1.3 percentage points off its growth estimate for India.

Earlier this month, the World Bank released a major development report focusing on the importance of employment to growth and stability — a concern given high rates of youth unemployment around the world after the recession.

The report found that more than half a billion young people are neither working nor studying, and estimated that the world would need to create about 600 million new jobs in the next 15 years just to keep the unemployment rate constant.

“Governments need to move jobs to center stage to promote prosperity and fight poverty,” Jim Yong Kim, the World Bank president, said.“Jobs equal hope. Jobs equal peace. Jobs can make fragile countries become stable.”

Expectations for progress are low heading into the IMF and World Bank meetings. The major political transitions in China, the United States and other countries have put issues like quota reform on the back burner.

© 2012 The New York Times News Service

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