The global economy will grow slightly less this year than was expected, held back by a weak eurozone that will stay mired in recession a second straight year, the IMF predicted Wednesday.
“Downside risks remain significant, including prolonged stagnation in the euro area and excessive short-term fiscal tightening in the United States,” the International Monetary Fund said, in an economic outlook update.
The IMF projected global gross domestic product (GDP) annual growth of 3.5 per cent this year, a dip of 0.1 point from its October forecast, and 4.1 per cent next year.
“The growth numbers are not enough to make a dent to the unemployment rate in advanced economies,” Olivier Blanchard, the IMF’s chief economist, warned at a news conference.
Despite some progress in the eurozone’s efforts to fight the public debt crisis, including a strengthened European Union-wide policy response, “the return to recovery after a protracted contraction is delayed,” the report said.
The IMF said the 17-nation economy now was expected to contract by 0.2 per cent this year instead of growing by 0.2 per cent.
The reversed outlook for the region, where Greece, Ireland and Portugal are under IMF bailout programs and Cyprus could be next, stemmed from delays in improvements in the banking sector and “still-high uncertainty about the ultimate resolution of the crisis despite recent progress,” it said.
“During this year, however, these brakes start easing, provided that the planned policy reforms to address the crisis continue to be implemented.”
Germany’s economy, the European powerhouse, was expected to expand 0.6 per cent this year, down 0.3 point from the prior forecast.
In its World Economic Outlook Update report, the IMF highlighted that austerity measures must be “sustained” in the eurozone’s periphery countries and supported by the core economies.
Blanchard, who backs a somewhat softer approach, noted the IMF had eased certain austerity plans under its bailouts but insisted cost-cutting remained essential.
“The slower you grow, the more financing is needed, and there’s not infinite financing,” he said.
The IMF offered a different prescription for the United States, stressing the importance of avoiding “excessive” fiscal tightening in the short term so as not to snuff out flickering growth in the world’s largest economy, forecast at 2.0 per cent this year.
In early January, the US Congress prevented part of the so-called fiscal cliff measures from taking place, but massive automatic government spending cuts loom unless deeply divided lawmakers can reach a deficit-reduction deal.
The IMF called on the United States to “promptly” raise the debt ceiling and “agree on a credible medium-term fiscal consolidation plan, focused on entitlement and tax reform.”
For Japan, the priority is to undertake structural reforms and wield a “more ambitious monetary policy easing” to boost growth and inflation.
Emerging market and developing countries again will grease the global economy’s engine this year, growing a combined 5.5 per cent, the IMF forecast.
China’s GDP is expected to grow 8.2 per cent, followed by India at 5.9 per cent and a 3.5 per cent rate in Brazil and Mexico. Sub-Saharan Africa was expected to see 5.8 per cent GDP growth.
“But weakness in advanced economies will weigh on external demand,” the IMF warned the developing world.
At a time when global financial reforms are facing resistance, the IMF report stressed the urgency of sustained efforts.
“It’s the constant approach by the industry to actually push back because it’s nicer to operate without regulation rather than with regulation,” IMF managing director Christine Lagarde said last week.