Budget cuts deal blow to growth in US, IMF says

Other advanced economies will also struggle as emerging Asia, Africa pick up momentum

PUBLISHED : Saturday, 13 April, 2013, 12:00am
UPDATED : Saturday, 13 April, 2013, 4:51am

The International Monetary Fund has lowered its growth forecast for the United States as automatic budget cuts take hold, according to a draft of the Washington-based lender's World Economic Outlook.

US gross domestic product will expand 1.7 per cent this year, lower than a previously forecast 2 per cent advance, according to the draft report, which was presented to the IMF board last week and may be subject to revisions before its scheduled April 16 release. The fiscal tightening that took effect in the US last month will restrain consumption in the country's economy temporarily, the report said.

The global economy will expand 3.4 per cent this year, below the 3.5 per cent that the IMF forecast in January, according to projections in the report.

The 17-nation euro zone will contract 0.2 per cent, unchanged from January's forecast, with uncertainty around Italy's election adding to challenges facing policymakers fighting Europe's debt crisis, it said.

"The road to recovery in the advanced economies will remain bumpy," the draft report said. "The weak ending to economic activity in 2012 and the sluggish beginning in 2013 highlight that important brakes remain in place."

The report said two of the biggest threats to the global economy - a euro-area break-up and a sharp fiscal contraction in the US - have been "successfully defused" over the past six months. In Japan, the pace of growth this year is forecast to reach 1.5 per cent, up from the IMF's outlook in January for a 1.2 per cent expansion.

The report also downplayed concerns that looser monetary conditions in some countries hurt the economies of other countries.

"Complaints about competitive exchange rate depreciations appear overblown," it said. "At this juncture, there seem to be no major deviations of the main currencies from medium-term fundamentals."

The report said the US dollar and euro "appear moderately overvalued" and China's yuan "moderately undervalued." It said the evidence on the yen's value is "mixed".

The document echoes comments made earlier this week by IMF managing director Christine Lagarde, who warned that the US budget impasse will prevent the world economy from gaining much traction this year.

"This risks throwing away needed growth, especially at a time when too many people are still out of work," Lagarde said in a speech in New York. "It is also an extremely blunt instrument, imposing deep cuts in many vital programmes - including those that help the most vulnerable - while leaving untouched the key drivers of long-term spending."

On Thursday President Barack Obama sent a US$3.77 trillion budget to Congress, calling for more tax revenue and slower growth in Social Security benefits to replace across-the-board spending cuts.

Meanwhile, growth in emerging markets, especially in smaller countries, is picking up steam, according to the draft report. That should help prop up global growth next year, which the IMF sees rising to 4.1 per cent, unchanged from its January forecast.

The IMF report said that the economies of most developing countries - especially in Asia and sub-Saharan Africa - are experiencing faster growth as demand from rich nations strengthens, but that a few economies in Latin America are "slipping into crisis-like conditions".