IMF says Europe weighing on global growth, but eyes 2014 rebound

Wed Jan 23, 2013 9:59am EST

Related Topics

* IMF predicts weak growth in 2013, rebound next year

* IMF warns downside risks still significant

* Activity in advanced economies still weak

* Fund sees some pick up in emerging economies

By Lesley Wroughton

WASHINGTON, Jan 23 (Reuters) - An unexpectedly stubborn euro zone recession and weakness in Japan will weigh on global economic growth this year before a rebound in 2014 that should deliver the fastest expansion since 2010, the International Monetary Fund said on Wednesday.

The IMF trimmed its 2013 forecast for global growth to 3.5 percent from the 3.6 percent it projected in October, but said it looked for a 4.1 percent expansion in 2014 if a recovery takes a firm hold in the euro zone. It said the world economy grew 3.2 percent last year.

Healthy global growth rates of above of above 4 percent were last seen in 2010, when output expanded 5.1 percent as the global financial crisis eased.

The IMF said activity in advanced economies would likely remain weak this year with growth of just 1.4 percent before strengthening to 2.2 percent in 2014. In October, it projected developed economies would expand 1.5 percent in 2013.

"Policy actions have lowered acute risks in the euro area and the United States," the IMF said in an update of its World Economic Outlook. "However, downside risks remain significant, including renewed setbacks in the euro area and risks of excessive near-term fiscal consolidation in the United States."

The United States is due to run out of room under a self-imposed borrowing limit of $16.4 trillion sometime between mid-February and early March.

Republicans, who want to use the need to raise the debt ceiling as leverage to exact deep spending cuts, have signaled a willingness to pass a nearly four-month extension of the debt limit, defusing immediate fears of a damaging U.S. debt default but keeping a longer-term threat alive.

The IMF said the U.S. economy was set to expand 2 percent this year, with growth rising above trend in the second half of this year and reaching 3 percent in 2014.

"The priority is to avoid excessive fiscal consolidation in the short term, promptly raising the debt ceiling, and agree on a credible medium-term fiscal consolidation plan, focused on entitlement and tax reform," it said.

POLICY CHALLENGES FOR EUROPE, JAPAN

The IMF said a prolonged stagnation in the euro zone is a threat especially if the currency bloc fails to complete fiscal and banking reforms.

The IMF said Japan's economy is likely to manage 1.2 percent growth this year, helped by fiscal stimulus, an easing of monetary policy and a weaker yen, But it warned that growth was likely to slow to 0.7 percent in 2014.

It urged Tokyo to adopt a more ambitious easing of monetary policy and a "credible" medium-term plan to tighten its budget.

Meanwhile, growth in emerging and developing economies should strengthen to 5.5 percent this year and 5.9 percent in 2014, the IMF said, adding that supportive policies had helped boost growth although weak demand from trading partners would still be a problem.

The pace of growth in China was set to increase to 8.2 percent this year and 8.5 percent in 2014, up from 2012 but still lower than the 10 percent growth rates of 2010, the fund said.

Developing Asia, including China and India, will remain the fastest-growing region in the world, according to IMF forecast, with growth of 7.1 percent this year and 7.5 percent in 2014.

Africa, with growth likely around 5.8 percent this year and 5.7 percent next year, is the world's second-fastest growing.

FILED UNDER:
A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

Find your dream retirement town

Florida? Hawaii? Reuters has teamed up with Zillow to give you the power to customize a list of your best places to retire.  Video | Full Article