Business

Global recovery still under threat, says IMF outlook

  • 16 July 2012
  • From the section Business

The global economic recovery is still at risk, and eurozone economies remain in a "precarious" situation, the International Monetary Fund has said.

A delayed or insufficient response from European leaders to the crisis would further derail the recovery, it said.

The IMF downgraded its forecast for global growth for 2013 to 3.9% from the 4.1% prediction it made in April.

One of the biggest downward revisions was to the UK, now expected to grow by 1.4% in 2013. In April it predicted 2%.

The forecast for growth in 2012 was also reduced for the UK, down to 0.2% from the 0.8% cited in April.

The IMF's prediction for world output this year - as measured by gross domestic product - was little changed at 3.5%.

In its updated World Economic Outlook, which is published twice each year, the Washington-based lender said: "Downside risks continue to loom large, importantly reflecting risks of delayed or insufficient policy action."

'Precarious situation'

The euro area will remain in a "precarious" situation unless leaders take further action to avoid the sovereign debt crisis from escalating and prevent a market meltdown, the report said.

"The utmost priority is to resolve the crisis in the euro area," said the report.

The 17-member eurozone economy is expected to contract by 0.3% this year before rebounding by 0.7% next year.

The IMF, along with the European Central Bank (ECB) and the European Union, has demanded austerity measures in the struggling periphery economies of Greece, Spain and Portugal in return for bailouts.

The crisis has led millions of people to lose their jobs and benefits. There were also concerns that runs on bank deposits would trigger a eurozone-wide bank run and banking crisis.

Europe must be committed towards forging a "complete" monetary integration by pursuing a banking and fiscal union, said the IMF.

Recently, eurozone leaders agreed to bail out Spanish banks directly and unveiled a plan to implement a fiscal and banking unification. But the proposals for such a decision will not become concrete until later this year, and it is not yet known how long it will take for such a union to take shape.

The ECB last week cut its benchmark lending rate below 1% for the first time, to 0.75%.

But the IMF called on the central bank to use more unorthodox monetary tools, such as providing the region's banks with additional unlimited loans, or long-term refinancing operations (LTROs).

A similar move last December helped to calm markets and brought down crucial borrowing costs for struggling economies.

However, the effects have waned in recent weeks as eurozone efforts to solve the crisis failed to shore up investor confidence.

US deadlock

The IMF also urged US lawmakers to solve a deadlock on how to deal with a "fiscal cliff" - which refers to a set of fiscal deadlines at the end of the year, including deciding whether to extend tax cuts for the wealthiest Americans.

"If policymakers fail to reach consensus on extending some temporary tax cuts and reversing deep automatic spending cuts, the US structural fiscal deficit could decline by more than four percentage points of GDP in 2013," the IMF warned.

"US growth would then stall next year, with significant spillovers to the rest of the world."

The US economy is expected to grow by 2.0% this year and 2.3% in 2013.

Overall, growth in advanced economies is projected to expand by 1.4% this year and 1.9% the following year, the IMF now predicts.

Emerging market power

Growth in emerging economies was also revised downwards. They are now forecast to see growth slow down to 5.6% in 2012 before picking up to 5.9%, the IMF report said.

Growth momentum dropped particularly in Brazil, China and India, considered to be the drivers of a global recovery.

That was aggravated by risk aversion among investors who pulled out their money out of these economies, causing domestic share prices to tumble.

But developing economies are being supported by a number of government measures to shore up growth, as well as lower oil prices, said the IMF.

One of the rare bright spots for the global economy is inflation, which is expected to ease as demand and commodity prices, including oil, weaken.