The global economy is much weaker than believed just months ago as advanced economies stutter, and will pick up only slightly next year, the International Monetary Fund says.
The IMF has lowered its growth forecasts for the global economy to four per cent for 2011 and 2012, saying activity has “weakened significantly”, but warned of a return to recession if Western leaders fail to get their economies back on track.
“The evidence points to continued, uneven growth,” the IMF said in a twice-yearly outlook report on Tuesday.
The global economy, which rebounded in 2010 following the 2008-2009 Great Recession, has been dragged down by persistent debt and deficit problems in the advanced countries, particularly the United States and the eurozone, it said.
CHINA, INDIA ALSO IN TROUBLE
Emerging market economies that have been the recovery’s driving force, such as China and India, will not escape unscathed from the weakness in the advanced economies, the Washington-based lender said in its semi-annual World Economic Outlook.
“Many emerging economies need to make faster progress in strengthening fiscal fundamentals before cyclical factors or spillovers from advanced economies … turn against them,” it said in an accompanying analysis.
“Anemic” consumption in advanced economies and spiking financial volatility over worries about US and eurozone public debt have put the brakes on growth, originally forecast to be half a percentage point higher for this year.
The advanced economy slowdown was “a development we largely failed to perceive as it was happening”, acknowledged Olivier Blanchard, the chief economist of the 187-nation institution.
Fiscal and financial uncertainty gathered steam in August, roiling financial markets as investors watched political gridlock in Washington over US debt and deficits and the spreading contagion of Greece’s debt crisis in the eurozone.
“Markets have clearly become more skeptical about the ability of many countries to stabilise their public debt,” Blanchard said.
“Strong policies are urgently needed to improve the outlook and reduce the risks,” he said.
The United States, the world’s largest economy, suffered the most notable downgrade – about a percentage point – with gross domestic product growth estimated at 1.5 per cent this year and 1.8 per cent in 2012.
For the 17-nation eurozone, GDP growth was projected to slow by about a half point, to 1.1 per cent in 2012.
Japan’s economy is rebounding from the March earthquake-tsunami disaster, the IMF said, and is expected to contract 0.5 per cent this year, less than previously estimated, before clocking in 2.3 per cent growth in 2012.
For emerging and developing economies, the IMF said capacity constraints, policy tightening and slowing foreign demand would result in slightly slower growth of 6.1 per cent in 2012.
China will continue to lead with a nine per cent expansion next year.
Growth downgrades were nearly universal, from Russia, Latin America and Sub-Saharan Africa to the Middle East and North Africa.
The IMF warned that a negative feedback loop between low growth and fiscal and financial stability is at the heart of risks facing the world economy.
Worries about sovereign debt have spread amid slowing growth, extending to the banks holding those government bonds, mainly in Europe.
“Policy indecision has exacerbated uncertainty and added to financial strains, feeding back into the real economy,” the IMF warned.
The IMF said its projections “assume that policymakers keep their commitments and the financial turmoil does not run beyond their control, allowing confidence to return as conditions stabilise”.
If they fail to do that, “the major advanced economies could fall back into recession”.
“Vulnerable sovereigns are prone to a sudden loss of investor confidence in their debt sustainability if fundamentals deteriorate sharply.”
A separate IMF report showed that the budget woes of Greece, at the heart of Europe’s problems, had risen.
In the Fiscal Monitor, the IMF revised up its projection of Greek debt to 189 per cent of GDP in 2012, from a June estimate of 172 per cent.