IMF warns economic slowdown deepens

The IMF said the global economic slowdown is worsening as it cut its growth forecasts for the second time since April and warned US and European policymakers that failure to fix their economic ills would prolong the slump.

Global growth in advanced economies is too weak to bring down unemployment and what little momentum exists is coming primarily from central banks, the International Monetary Fund said in its World Economic Outlook, released ahead of its twice-yearly meeting, which will be held in Tokyo later this week.

“A key issue is whether the global economy is just hitting another bout of turbulence in what was always expected to be a slow and bumpy recovery or whether the current slowdown has a more lasting component,” it said.

“The answer depends on whether European and US policymakers deal proactively with their major short-term economic challenges.”

Ahead of the Tokyo meeting, policymakers have flagged the US “fiscal cliff” – government spending cuts and tax raises due to take affect early in 2013 – and resolving the euro area’s debt crisis as the top issues facing the global economy.

US Treasury Secretary Timothy Geithner said yesterday reforms in Europe “could take years to bear fruit”.

“We are very worried about risk of collapse in Europe ... Europe has a hard road ahead,” he said during a visit to India.

His comments echoed those of Canadian Finance Minister Jim Flaherty, who last week said Europe‘s debt crisis was “a clear and present danger”.

The IMF forecast in its latest health check on the world economy that global output in 2012 would grow just 3.3 per cent, down from a July estimate of 3.5 per cent.

That would make this the slowest year of growth since 2009 when the world was struggling to pull out of the global financial crisis. It predicted only a modest pickup next year to 3.6 per cent, below its July estimate of 3.9 per cent.

It projected US growth would be a little more than two per cent this year and next, but forecast a contraction in the euro area this year by 0.4 per cent and modest growth in 2013 of 0.2 per cent.

Emerging markets are still expected to grow four times as fast as advanced economies, but the IMF took a sharp knife to its estimates for India and Brazil, with the latter now seen growing slower than the United States this year.

It also cut its expectations for China in 2012 and 2013 but warned against being overly pessimistic about the prospects of these economies, which were major engines of growth in the global financial crisis.

“Let me be clear. We do not see these developments as signs of a hard landing in any of these countries,” IMF Chief Economist Olivier Blanchard said at a briefing, referring to China, India and Brazil.

The IMF said “familiar” forces were dragging down advanced economy growth: fiscal consolidation and a still-weak financial system, the same problems that have plagued the world since the global financial crisis exploded in 2008.

“More seems to be at work, however, than these mechanical forces – namely, a general feeling of uncertainty,” Blanchard said in a commentary on the forecasts.

Measures of risk and uncertainty, such as the VIX volatility gauge in the United States, remain at low levels, Blanchard pointed out, which makes it difficult to assess the nature of the uncertainty.

Eurozone finance ministers on Monday unveiled the European Stability Mechanism, a €500 billion rescue mechanism for lending to distressed economies in the 17-country bloc.