IMF sounds alarm on risk of global growth slowdown

Lender winds back forecasts and cautions Europe and US to confront economic threats

PUBLISHED : Wednesday, 10 October, 2012, 12:00am
UPDATED : Wednesday, 10 October, 2012, 4:58am

The International Monetary Fund cut its global growth forecasts and warned of even slower expansion unless officials in the US and Europe addressed threats to their economies.

The world economy would grow 3.3 per cent this year, the slowest since the 2009 recession, and 3.6 per cent next year, the IMF said yesterday, compared with July predictions of 3.5 per cent this year and 3.9 per cent in 2013. The IMF now sees "alarmingly high" risks of a steeper slowdown, with a one-in-six chance of growth slipping below 2 per cent.

"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 IMF said in its "World Economic Outlook" report. "The answer depends on whether European and US policymakers deal proactively with their major short-term economic challenges."

The IMF's 188 member countries convene in Tokyo this week as low growth dampened by fiscal consolidation in the richest economies hurts developing nations from China to Brazil.

As the IMF urged measures to boost confidence, uncertainties in Europe showed no sign of abating, with leaders still divided over a banking union and Spain resisting a bailout.

"Confidence in the global financial system remains exceptionally fragile," the IMF said.

"Bank lending has remained sluggish across advanced economies" and increased risk aversion had damped capital flows to emerging markets, it said.

In Seoul, World Bank president Jim Yong-kim said he saw mildly encouraging signs in Europe. In Tokyo, IMF chief economist Olivier Blanchard indicated that yields on Spanish and Italian bonds, which fell after the European Central Bank's bond-buying plan announcement, could rise if the countries did not request bailouts.

The IMF report called for US policymakers to find an alternative to planned automatic tax increases and spending cuts that would trigger a recession.

Europeans must follow up on their commitments for a more integrated monetary union, and many emerging markets could afford to cut interest rates or pause tightening to fight off risks to their economies, the IMF said.

The euro-area economy would contract 0.4 per cent this year, 0.1 percentage point worse than forecast in July, and grow 0.2 per cent next year, less than the 0.7 per cent predicted three months ago, the IMF said.

The US would expand 2.2 per cent this year, higher than an earlier forecast, and grow 2.1 per cent next year, less than previously predicted.

Japan's estimate was cut to 2.2 per cent this year and to 1.2 per cent next year. Spain's economy would shrink 1.3 per cent next year, 0.7 percentage point worse than predicted in July.

"Spain and Italy must follow through with adjustment plans that re-establish competitiveness and fiscal balance and maintain growth," Blanchard wrote in a foreword to the report.

"To do so, they must be able to recapitalise their banks without adding to their sovereign debt. And they must be able to borrow at reasonable rates."

China's estimate was cut by 0.2 percentage point each year to 7.8 per cent this year and 8.2 per cent next year.