IMF: Global economy has entered 'dangerous new phase'

Oliver Blanchard, director of research at the IMF, says economic recovery has "weakened sharply"

The global economy has entered a "dangerous new phase" of sharply lower growth, according to the International Monetary Fund (IMF).

The organisation warned that continuing political and economic woes in the US and eurozone could force them back into recession.

The IMF says the prognosis for economies in the developed world is "weak and bumpy expansion".

It predicts their GDP will expand "at an anaemic pace of 1.5% in 2011".

The IMF believes global growth will shrink to 4% in 2012, from 5% last year, on factors such as "major financial turbulence in the eurozone".

It slashed its growth projections for the 17-nation eurozone to 1.6% in 2011, down from 2% predicted in June. Next year growth will be 1.1%, down from 1.7%, it forecast.

The US - the world's largest economy - is likely to have weak growth "for years to come".

UK worries

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The Fund has moved one step closer to saying the downside scenario has arrived. But it has stopped short of saying it. This is entirely understandable at a time when confidence is at a premium”

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And for the UK, the growth forecast for 2011 has also been revised downwards, from 1.5% to 1.1%, while the forecast for 2012 was cut to from 2.3% to 1.6%.

"It would be wise for both governments and businesses [in the UK] to develop contingency plans in case such a double dip scenario does emerge," said John Hawksworth, PwC's chief economist.

Among the major advanced economies, the IMF now thinks Germany and Canada will be the only countries to grow by more than 2% in 2011.

In 2012, none will grow that fast, except Japan, as its economy rebounds from this year after an earthquake and tsunami ravaged the country.

BBC economics editor Stephanie Flanders points out that the shorter-term growth forecast has been cut for every country listed - with particularly large downward revisions for the US and Italy.

Acting together

The IMF stressed strong leadership would crucial in staving off recession in the US and eurozone.

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We have the discipline and the determination to put right the huge deficit and debts we were left by the last government ”

End Quote William Hague MP UK Foreign Secretary

IMF chief economist Olivier Blanchard said that eurozone countries were lagging in the race to solve the sovereign debt crisis.

He said: "There is a wide perception that policymakers are one step behind the action. Europe must get its act together."

The perceived weakness in eurozone governments' response is one of the main factors behind the recent market turmoil.

"Leaders must stand by their commitments to do whatever it takes to preserve trust in national policies and the euro," the report said.

The IMF's statements come after credit rating agency Standard and Poor's downgraded Italy's debt rating amid mounting concerns about the country's finances.

And on Monday, the IMF warned Greece to implement agreed reforms or miss an 8bn-euro bailout instalment set for October, viewed as vital to keeping state finances afloat.

"Fragile" financial institutions needed to get private cash to survive over funds from the public purse, or be "restructured or closed", said the IMF.

In a speech on Tuesday, European Competition Commissioner Joaquin Almunia also warned more banks in the region may need extra cash.

He said: "The worsening of the sovereign debt crisis, its impact on a fragile banking system and the continuing tensions in funding markets all point to the possible needs for further recapitalisation of banks on top of the nine that failed the stress tests earlier this year."

US concerns
Greek public sector employees burn their tax notices on 20 September Greece must continue with unpopular spending cuts and tax rises, the IMF says

The IMF report also voices concerns about the US economic recovery and the chance it might "suffer further blows" including a weak housing market and worsening financial conditions.

It warns that either of the issues could drag both the US and the euro area into recession.

It suggests that the US needs to devise a plan to "put public debt on a sustainable path and implement policies to sustain the recovery".

The IMF has also voiced fears that the US is facing what it calls a "very sluggish recovery of employment".

"Although [US] unemployment is below post-World War II highs, job losses during the crisis were unprecedented and came on top of lacklustre employment performance during the preceding decade," the report said.

It added that news of the US housing market had been disappointing, with "no end in sight to the overhang of excess supply and declining prices".

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