Growth in the U.S. and European economies has slowed
perilously close to stall speed, raising the risk of a
double-dip recession, while emerging markets are losing some of
their buoyancy, the International Monetary Fund said
The funds World Economic Outlook, the most
comprehensive forecast of the global economy, painted a sober
backdrop for the annual meetings of the IMF and World Bank in
Washington later this week. The slowdown makes it all the more
urgent for policymakers to take action to support growth, fund
officials said, calling for bolder measures by the European
Union to contain the blocs debt crisis, further
unconventional monetary easing by the Federal Reserve and an
acceleration of efforts by China and other emerging markets
countries to stimulate domestic demand.
The global economy has entered a dangerous new
phase, says Olivier Blanchard, the IMFs chief
economist. Strong policies are needed both to improve the
outlook and reduce risks.
The IMF slashed its growth forecast for the U.S. to 1.5
percent this year and 1.8 percent in 2012, compared with its
previous forecast of 2.5 percent and 2.7 percent, made only
three months ago. Fund economists see the euro area growing by
1.6 percent this year and 1.1 percent next, compared with 2.0
percent and 1.8 percent previously. The fund shaved its growth
forecast for emerging and developing economies by roughly a
quarter point, to 6.4 percent this year and 6.1 percent in
2012. Altogether, the global economy will grow by 4.0 percent
this year and next, the fund projects.
The downgrade represents an official recognition of what
markets have been signaling over the past few months. Most
private-sector economists have been reducing their forecasts in
recent weeks. J.P. Morgan predicts the U.S. will grow by 1.4
percent this year and just 1.2 percent in 2012; it puts global
growth at around 3.5 percent both years.
The global recovery was already slowing earlier this year
but the worsening of the European debt crisis and the
deterioration in the U.S. economy, exacerbated by the political
brinksmanship over the debt ceiling in July and early August,
have dealt significant blows to confidence, fund officials say.
Markets have become more skeptical about the ability
governments to stabilize their public debt, said
Europes debt crisis poses the greatest threat to the
world economy, and drew the strongest policy prescriptions from
fund economists. The World Economic Outlook called on European
governments to quickly ratify the expansion of the European
Financial Stability Facility, the blocs 440 billion
bailout fund. EU leaders agreed in July to increase the
facilitys effective firepower and range of uses in a bid
to prevent the debt crisis afflicting Greece, Ireland and
Portugal from spreading to Spain and Italy. In addition, the
outlook called on the European Central Bank to keep buying
European government bonds and to cut its benchmark interest
rate, currently at 1.5 percent, if downside risks to growth
The perception is that policymakers are one step
behind the markets, said Blanchard. Europe must get
its act together.
Fund officials sought to distinguish between Greeces
debt problems, which are severe but still eminently
manageable, according to senior economic advisor
Jörg Decressin, and the plight of other countries. Ireland
and Portugal are fulfilling the terms of their EU-IMF bailouts,
Decressin said, while Spain and Italy have taken fresh steps
recently to rein in their deficits. We still think it is
crazy to talk about a breakup of the euro area, he said.
Still, Blanchard urged EU leaders to prepare contingency plans
for a potential Greek exit. Policies would be needed to
ring-fence the other countries, he said. That would
be absolutely essential.
As for the U.S., the IMFs Outlook said the Federal
Reserve should stand ready to deploy more unconventional
support to sustain growth. That call came as the central
banks policy-making Federal Open Market Committee began a
two-day meeting to consider shifting some of its massive bond
holdings to longer-dated securities in an effort to drive down
Fund officials also warned of the risk that in the wake of
the August debt ceiling deal, U.S. fiscal policy would tighten
too much in the short term without making the kind of reforms
that would reduce deficits and debt over the long term. Getting
the balance right isnt easy, Blanchard conceded.
Fiscal consolidation cannot be too fast as it would kill
growth, he said. It cannot be too slow as it would
Many private economists fear the U.S. wont strike the
right balance. Bruce Kasman, chief economist at J.P. Morgan,
predicts that budget cuts will reduce U.S. growth by at least
one percentage point next year. Policy could actually do
damage here, he says.
The IMF Outlook contained a separate study showing that
significant declines in equity prices can signal a recession in
Western economies. It estimated that recent stock market
declines put the risk of recession at 38 percent in the U.S.,
17 percent in the U.K. and 18 percent in France.
Emerging markets continue to grow at a relatively strong
pace, but the weakness in advanced economies does pose a risk.
Blanchard said central banks in emerging markets countries,
most of which have been tightening policy over the past year to
combat inflation pressures, may have to ease policy in the near