IMF cuts global growth outlook, expects slowing in major economies
By SUDEEP REDDY
WASHINGTON -- The International Monetary Fund downgraded its outlook for the world economy on Monday and called on policymakers for stronger action to combat multiple risks to the weak global recovery.
The IMF said it expects the world economy to grow 3.5% this year, a modest downgrade of 0.1 percentage point from its forecast three months ago, but the fund's lowest forecast since 2009, the year following the financial crisis.
The projection is based on a trio of big assumptions: Euro-zone leaders take "sufficient policy action" to ease their financial crisis; the US government moves to avoid a sharp tightening in fiscal policy next year; and emerging-market countries' efforts to spur growth gain traction.
The fund warned that risks of a sharper slowdown "continue to loom large" due to the threat of delayed or insufficient action by policymakers. The report warned policymakers in Europe and the US of the dangers posed by the status quo.
"People feel the world has darkened a lot," IMF chief economist Olivier Blanchard said in an interview with The Wall Street Journal. "The trend is a bit worse than the forecast suggests. We still have a weak world recovery."
The projection for the current year marks the IMF's lowest annual growth forecast in about a decade, apart from 2009.
The IMF sees slower growth this year in almost every major economy as fears of a deeper downturn weigh on businesses and consumers globally, spurring a pullback in trade.
"The fact that this downside risk is not the tail risk anymore...is increasing uncertainty," Mr. Blanchard said. "I think that probably has an effect on decisions around the world."
The IMF said stresses in weaker European countries have returned to the crisis levels seen late last year before action by the European Central Bank to ease pressure in the currency bloc.
The ECB's moves helped power a rebound in financial conditions, global trade and industrial production that produced better-than-expected growth in the first quarter.
But that early improvement has faded, giving way to rising borrowing costs in struggling euro-zone countries such as Italy and Spain. The latest turns in these economies are prompting capital outflows and credit contraction as banks cut back.
The IMF praised European leaders' latest moves in late June to help Spanish banks and establish a single supervisor for euro-zone banks. The plans could ease the crisis if they are implemented and complemented by deeper fiscal integration and a full-fledged banking union, the IMF said.
But the fund highlighted the risks of repeating what it calls an "escalating cycle of turmoil" throughout the euro-zone crisis, in which a policy response spurs relief that eventually leads to political resistance, renewing a buildup of stress that requires new policy actions.
"The situation in the euro-area crisis economies will likely remain precarious until all policy action needed for a resolution of the crisis has been taken," the IMF said.
The fund said leaders of Europe's struggling economies, which are expected to contract at least through next year, need to stay on track in cutting their budget deficits and taking steps to boost competitiveness.
They also need support from stronger European members to tame runaway borrowing costs in the near term without waiting for long-term structures such as a banking union to be put in place.
"Even if they do everything they can, and do it right, it's still not enough," Mr. Blanchard said of nations such as Italy and Spain. "As long as they behave and they do all the things they're asked to do, they have to be able to borrow at lower rates than they currently do. Some way has to be found to do it."
A number of proposals on the table in Europe would lower borrowing costs, but the precise course is less important than the result, he said.
The IMF said the ECB may need to take more action to support the euro-zone economy, such as government-bond purchases, additional financing moves to support banks or asset purchases-known to many as quantitative easing.
Mr. Blanchard said depreciation of the euro against the dollar "would be a good thing" to support the struggling European economy. IMF simulations show that a 10% depreciation in the European currency would generate a 1.4% increase in economic output for a year.
However, that would benefit stronger economies such as Germany and the Netherlands rather than the struggling periphery economies such as Greece, Portugal, Spain and Italy.
"The periphery countries have to improve their competitiveness," Mr. Blanchard said. "That's not something monetary policy at the level of the euro or fiscal policy can do."
Though Europe remains the epicenter of risk in the global economy, the IMF said concerns have spread far beyond the continent.
The US economy is showing "less robust growth" than forecast in April due to "an underlying loss of momentum," the fund said.
The IMF's latest forecast for the world is based on the assumption that US lawmakers will prevent large government spending cuts and tax increases from taking effect as scheduled at the end of this year. Otherwise US growth would stall next year, creating new global risks, the IMF said.
Emerging economies such as Brazil, China and India also are slowing due to global forces, weaker domestic demand and higher risk aversion among investors.
The fund lowered its outlook for Brazilian growth this year to 2.5%, from the 3.1% it estimated in April. It cut the 2012 growth projection for India to 6.1% from 6.8% previously.
"All of them, in different modes, have had to slow down either in exports or investments," Mr. Blanchard said. "My sense is we may well be in a regime in which these growth rates will be a bit lower than they were" over the past decade.
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