IMF lowers world economic growth forecast
An international lending organisation has slightly lowered its outlook for global growth over the next two years.
The International Monetary Fund (IMF) also warned that Europe’s financial crisis and a potential budget crisis in the US could slow world economic growth even further.
The world economy will likely expand 3.5% this year, the IMF said in a quarterly update to its World Economic Outlook. That is down slightly from its previous estimate of 3.6% in April.
The IMF also cut its forecast for global growth to 3.9% in 2013, from 4.1% three months ago.
And it shaved its US growth forecast to 2% this year from 2.1% in April. For 2013, it expects US growth of 2.3%, down from 2.4%.
The IMF also warned that the United States could fall back into a recession next year if Congress does not deal with a pending fiscal crisis.
Several large tax cuts are set to expire at the end of the year and big spending cuts are scheduled to kick in at the same time. Those changes, known as the “fiscal cliff”, could cause the US economy to “stall” next year, the report said.
Olivier Blanchard, the IMF’s chief economist, said failure to deal with these issues could cut up to 4 percentage points off US growth in 2013. It would also reduce growth in other advanced economies – principally Europe, Canada and Japan - by 1.5 percentage points.
“We are talking about, potentially, an enormous shock,” Mr Blanchard said.
“If it were to happen, it would be a major, major event.”
Mr Blanchard noted that Europe’s leaders must follow through on the promises that were made at a leaders’ summit at the end of last month. At that time, the 17 nations that use the euro agreed to centralise the regulation of European banks and to expand the use of the region’s bailout funds.
European leaders need to ensure that borrowing costs for Spain and Italy do not get so high that they are unable to borrow from private lenders, possibly necessitating another bailout.
“The implications of such an event could easily derail the world recovery,” Mr Blanchard said.
The IMF had previously warned that the US economy could face another recession if the tax increases and spending cuts kick in.
The US should also raise its borrowing limit, the report said. The level of debt the government can issue is capped by law. Last August, a battle between the Obama administration and Congress over raising the limit was not resolved until the US almost defaulted on its debt.
IMF Managing Director Christine Lagarde warned in early July about the consequences if the US failed to raise the debt limit and avoid the fiscal cliff. She said they “would be severe with negative spillovers to the rest of the world”.
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