The International Monetary Fund slashed its growth forecast for the world economy on Monday, citing increasing signs of weakness in the global recovery due to the ongoing European debt crisis and a slowdown in emerging economies.
In an update to its twice-yearly World Economic Outlook, the lender trimmed the growth forecast for 2013 to 3.9 percent from the 4.1 percent predicted in April. The projection for this year was left largely unchanged at 3.5 percent.
"More worrisome than these revisions to the baseline forecast is the increase in downside risks," IMF Chief Economist Olivier Blanchard said.
Advanced economies are now expected to expand 1.4 percent this year, in line with the April projection. The forecast for next year was lowered to 1.9 percent from 2 percent.
The 2012 growth outlook for the U.S. was cut to 2 percent from 2.1 percent, while the 2013 projection was lowered to 2.3 percent from 2.4 percent.
The crisis-plagued Eurozone is still expected to shrink 0.3 percent this year. The 2013 growth forecast for the currency-bloc was cut to 0.7 percent from 0.9 percent.
Within the Eurozone, Germany is expected to grow 1.0 percent this year, better than 0.6 percent seen in April. Next year, the largest economy in the euro area is seen expanding 1.4 percent, which is less than the 1.5 percent forecast earlier.
France is expected to log 0.3 percent growth this year, below April's projection of 0.4 percent. The forecast for 2013 was slashed to 0.8 percent from 1 percent.
Among the big four, Italy and Spain are expected to contract. Italy is seen shrinking 1.9 percent this year and 0.3 percent in 2013, unchanged from the previous forecasts.
Meanwhile, Spain's 2012 projection was upwardly revised to show a 1.5 percent contraction this year compared to the 1.9 percent contraction expected earlier. However, the country's outlook for 2013 was slashed and IMF now sees a 0.6 percent contraction versus the 0.1 percent growth expected in April.
The U.K. had the most severe downgrade in growth projections. The 2012 forecast was slashed to 0.2 percent from 0.8 percent, while the 2013 outlook was cut to 1.4 percent from 2 percent.
In Asia, Japan's growth forecast for this year was raised to 2.4 percent from 2 percent. However, the outlook for growth next year was cut to 1.5 percent from 1.7 percent.
The emerging economies also saw downgrades to their growth forecasts. China, which was earlier expected to grow 8.2 percent this year, is now seen expanding 8 percent. The projection for growth next year was cut to 8.5 percent from 8.8 percent.
India's growth forecast for 2012 was cut sharply to 6.1 percent from 6.8 percent. Next year, the economy is expected to grow only 6.5 percent, much less than April's prediction of a 7.3 percent expansion.
Canada is still expected to grow 2.1 percent this year and 2.2 percent next year.
According to the IMF, 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 euro periphery countries have to succeed," Blanchard said.
The Washington-based lender has based the latest projections on three assumptions. Firstly, policymakers are expected to take enough action to ease the financial conditions in the euro area periphery, including Greece and Spain, through 2013.
Secondly, the IMF does not expect the U.S. fiscal policy to tighten sharply next year. Finally, it expects emerging markets to take steps to boost growth momentum.
Calling the June 28th deal struck by euro area leaders as "a step in the right direction," the IMF said that the timely implementation of the agreed measures, together with further progress on banking and fiscal unions, must be a priority.
The IMF also released its update to the Global Financial Stability Report, which said the risks to financial stability increased in the second quarter of 2012. The reasons cited were the continued slow global recovery and fears about the quality of bank assets in Europe.
An update to the IMF's Fiscal Monitor released today indicated that fiscal adjustment in both advanced and emerging economies is proceeding as expected. Advanced economy budget deficits are forecast to decline by about 0.75 percent of GDP this year and about 1 percent of GDP in 2012, the report said.
While Spain and Italy are implementing sizable deficit reductions in the next two years, the adjustment is proceeding in Greece, Ireland and Portugal, the lender said.
The recent deterioration in the political and economic climate in Greece serves as a warning about the potential onset of "adjustment fatigue," which remains a threat to continued reforms, the Fiscal Monitor added.
by RTT Staff Writer
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