The International Monetary Fund cut its forecast for global economic growth and warned that the outlook could dim further if policymakers in the euro zone do not act with enough force and speed to quell their region’s debt crisis.
In a mid-year health check of the world economy, the IMF said emerging market nations, long a global bright spot, were being dragged down by the economic turmoil in Europe. It said a drop in exports in these countries would combine with earlier policies meant to prevent overheating and slow growth more sharply than hoped.
The IMF shaved its 2013 forecast for global growth to 3.9 percent from the 4.1 percent it projected in April, trimming projections for most advanced and emerging economies. It left its 2012 forecast unchanged at 3.5 percent, Reuters reports.
“Downside risks to this weaker global outlook continue to loom large,” the IMF said. “The most immediate risk is still that delayed or insufficient policy action will further escalate the euro area crisis.”
U.S. stocks closed slightly lower on Monday as investors worry about the economy losing steam.
The global lender said advanced economies would grow only 1.4 percent this year and 1.9 percent in 2013.
It also trimmed its forecast for emerging economies, projecting they will expand 5.9 percent in 2013 and 5.6 percent in 2012. Both figures are 0.1 of a percentage point lower than in April.
The IMF cut its 2013 growth forecast for the crisis-hit euro zone to 0.7 percent, while maintaining its projection of a 0.3 percent contraction this year. It said it now believes Spain’s economy will shrink both this year and next.
The IMF sharply revised down its growth projections for the United Kingdom to 0.2 percent this year and to 1.4 percent in 2013. In April, the fund said the UK economy would expand 0.8 percent in 2012 and 2.0 percent next year.
Central banks in China, the euro zone and Britain have all eased monetary policy in recent weeks to support growth. The U.S. Federal Reserve has said it is poised to do more if needed.
The IMF said the European Central Bank had room to ease policy further and said officials in emerging economies should stand ready to cope with a drop in trade and increased volatility in capital flows.
MOVING IN THE RIGHT DIRECTION, BUT …
The fund praised crisis-fighting measures adopted by European leaders at a summit in June as “steps in the right direction,” but called for more fiscal and banking integration.
It urged the creation of a pan-European deposit insurance guarantee program and a mechanism to resolve failing banks, and called on the ECB to provide ample liquidity to support banks under “sufficiently lenient conditions.”
It made clear, however, that Europe was not the only risk.
The IMF, which trimmed its U.S. forecasts slightly, said concerns were rising over a political battle brewing in Washington over how to avoid painful automatic spending cuts and tax increases at the start of next year.
The United States faces a “fiscal cliff” with the scheduled expiration of Bush-era tax cuts and $1.2 trillion in automatic spending reductions – enough budget tightening to knock the still-weak U.S. economy back into recession.
If the United States failed to deal with the “fiscal cliff” it could potentially be an “enormous shock” to the U.S. and other advanced economies, IMF Chief Economist Olivier Blanchard told a news conference.
Washington is also expected to run into the statutory $16.4 trillion cap on its debt before the end of the year, raising the prospect of a default absent congressional action to raise it.
While financial markets believe Congress and the White House will find a way to avoid a fiscal train wreck, the IMF warned of the “potential for a significant adverse market reaction” if that consensus view began to falter.
The IMF said while emerging economies, such as China, may no longer be growing at a rapid 10 percent annually, growth in these countries was likely to remain strong.
“It is really case by case but in general we think (emerging economies) will be able to increase demand and grow at fairly high rates,” Blanchard said.
“The question here is whether these countries will be able to handle this slowdown in demand? Here we think they really have the policy space to do it,” he said, “In terms of sustaining high growth, we think they can do it.”
Earlier this year, policymakers in emerging economies were worried about large-scale capital inflows and excessive appreciation of their currencies. Now, concerns have shifted to a rapid depreciation and increased volatility in exchange rates. Currencies like the Brazilian real and Indian rupee have depreciated by between 15 and 25 percent in less than a quarter, the IMF noted.
The IMF cut its 2012 growth forecast for China to 8.0 percent from 8.2 percent, and said it now expects growth of 8.5 percent next year, down from 8.8 percent.
It revised its growth projections for India to 6.1 percent this year from 6.9 percent, and chopped its 2013 forecast to 6.5 percent from 7.3 percent.
Blanchard attributed the fall-off in Indian growth and investment to “political uncertainty about policy” and freezing of permits for infrastructure projects. The country faces tough elections by 2014 that are widely expected to produce a fragmented parliament with no clear winner.
Meanwhile, Africa’s growth is still seen at a robust 5.4 percent this year and 5.3 percent in 2013, as the region remains relatively insulated from external financial shocks.
The IMF said growth in the Middle East will be stronger this year as key oil-producing countries boost production and Libya’s economy rebounds from conflict in 2011, but it held its forecast for next year at 3.7 percent.