Half-yearly World Economic Outlook report revises down forecasts to 2.9% in 2013 and 3.6% in 2014
Badly handled budget cuts in the United States and a slowdown in activity in big developing countries mean the global economy will expand more slowly than expected this year, the International Monetary Fund has said.
Revising down its forecasts for growth in both 2013 and 2014, the fund warned that the performance could be even more lacklustre and said the Federal Reserve, the American central bank, needed to take special care as it contemplated reducing its colossal stimulus to the world’s biggest economy.
The IMF now expects the global economy to expand by 2.9% in 2013 and 3.6% in 2014 – down by 0.3 and 0.2 points respectively on its last predictions, made in July – despite signs of recovery in the euro area.
“Global growth is still weak, its underlying dynamics are changing, and the risks to the forecast remain to the downside,” the fund said in its World Economic Outlook (WEO).
The half-yearly analysis of global trends was critical of the way across the board budget cuts had been handled in Washington, noting that they had contributed to weaker US growth.
“The US economy remains at the centre of events. Private demand continues to be strong, although growth has been hobbled this year by excessive fiscal consolidation,” Olivier Blanchard, the IMF’s economic counsellor, said. “Politics is creating uncertainty about both the nature and the strength of the fiscal adjustment. The sequester is a bad way to consolidate, and conflicts around increasing the debt ceiling could lead to another bout of destabilising uncertainty and lower growth.”
IMF forecasts now show the US growing by 1.6% this year and 2.6% in 2014, down 0.1 and 0.2 points on its last estimates. Even so, it said it was time for the Fed to make plans for an exit from ultra-low interest rates and quantitative easing, the bond-buying strategy that has sought to pump credit into the US economy.
Blanchard said: “While there are no major conceptual or technical issues involved, the communication problems facing the Federal Reserve are new and delicate. It is reasonable to expect some volatility in long rates as Fed policy shifts.”
The fund believes the Fed – which decided last month to wait longer before starting to scale back QE – will need to act with care and communicate its strategy clearly, given the slowdown in Chinese growth, the fragmented financial system in the euro area, and worryingly high levels of public debt in the west. It warned that old problems could trigger new crises.
Blanchard said the major news in the WEO came from emerging market economies, where the fund had been surprised by the declines in growth.
“The obvious question is whether this slowdown reflects cyclical factors or a decrease in potential output growth. Based on what we know today, the answer is that it reflects both, albeit to different degrees in various countries – more cyclical in Russia and South Africa, more decreased potential in China and India,” Blanchard said.
He added that recovery from the worst global downturn of the modern age was continuing but at too slow a pace. “The focus at this time is on emerging market economies – specifically, on the combination of slower growth and tighter financial conditions triggered by US monetary policy.
“But in the background, other legacies of the crisis still linger, and may well come back to the fore. Public debt and, in some cases, private debt remain very high, and fiscal sustainability is not a given. The architecture of the financial system is evolving, and its future shape is still unclear.”
The IMF said the impulse to stronger global growth in 2014 was expected to come mainly from the US, where activity is predicted to move into a higher gear as the impact of higher taxes and lower spending eases and the Fed only slowly withdraws its stimulus.
“In the euro area, business confidence indicators suggest that activity is close to stabilising in the periphery and already recovering in the core economies”, the WEO noted.
“Emerging market and developing economy growth rates are now down some three percentage points from 2010 levels, with Brazil, China and India accounting for two thirds of the decline.”
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