IMF says it expects the world economy to expand 3.5% in 2012 down slightly from its previous estimate of 3.6% in April. In a quarterly update to its World Economic Outlook issued Monday, the IMF also cut its forecast to 3.9% in 2013, from 4.1% three months ago.
The Fund cut its US growth forecast to 2% this year from its previous estimate in April of 2.1% and kept Eurozone performance in 2012 unchanged at a contraction of 0.3% and down from a growth of 0.9% in 2013 to 0.7%. For 2013, it expects US growth of 2.3%, down from 2.4%.
An already sluggish global recovery shows signs of further weakness, mainly because of continuing financial problems in Europe and slower-than-expected growth in emerging economies, the IMF said in a regular update to its World Economic Outlook (WEO).
Two other IMF reports were also released July 16. The update to theGlobal Financial Stability Report (GFSR) said that risks to financial stability increased in the second quarter of 2012 because of the continued slow global recovery and fears about the quality of bank assets in Europe.
An update to the IMF’sFiscal Monitor said that fiscal adjustment in both advanced and emerging economies is proceeding as expected.
The latest World Economic Outlookprojects that the global economy will grow 3.5% this year, down 0.1%age points from the April forecast, and 3.9% in 2012, 0.2%age points lower (see table).
“More worrisome than these revisions to the baseline forecast is the increase in downside risks,” said Olivier Blanchard, the IMF chief economist and director of the IMF’s Research Department, which prepares the WEO. The IMF emphasised that the relatively minor setback to the global outlook under its baseline projections is based on three important assumptions:
- that there will be enough policy action for financial conditions in the so-called euro area periphery, which includes Greece and Spain, to ease gradually through 2013;
- that US fiscal policy does not tighten sharply in 2013; and
- that steps by some major emerging markets to stimulate growth gain traction.
The IMF said the most immediate risk to the global recovery is that delayed or insufficient policy action will further escalate the euro area crisis. “Simply put, the Eurozone periphery countries have to succeed,” said Blanchard.
The report cited agreements at the June 28 eurozone summit as a step in the right direction. It said the summit actions should help break the “adverse links between sovereigns and banks and create a banking union. ”
But the recent deterioration in sovereign debt markets demonstrates that timely implementation of these measures, together with further progress on banking and fiscal unions, must be a priority.
The WEO update also cited the possibility that growth in the United States would stall because of excessive fiscal tightening caused by political gridlock. “In the extreme, if policymakers fail to reach consensus on extending some temporary tax cuts and reversing deep automatic spending cuts,” the US economy could face a steep decline of more than 4% of GDP in its fiscal deficit in 2013.
That so-called fiscal cliff would cause a severe decline in US growth, with “significant spillovers to the rest of the world.” Moreover, if the United States does not act promptly to raise its federal debt ceiling, there will be increased risk of financial market disruption and loss in consumer and business confidence.
Growth has slowed in a number of major emerging economies, especially Brazil, China, and India. This was due both to a weaker external environment and a sharp deceleration in domestic demand in response to capacity constraints and policy tightening.
Overall, though, emerging markets have weathered the crisis well. In contrast to the broad trends in the rest of the world, growth in the Middle East and North Africa will be stronger, as key oil exporters continue to boost oil production and drive up domestic demand, while activity in Libya rebounds after the 2011 unrest. Sub-Saharan Africa, which has been insulated from external financial shocks, is also expected to enjoy relatively robust growth in 2012–13.