UPDATE 2-IMF says Europe curbing global economy; hopeful on 2014

Wed Jan 23, 2013 2:28pm EST

* 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 expansion of 4.1 percent in 2014 if the euro zone
recovery takes a firm hold. It said the world economy grew 3.2
percent last year.
    Healthy global growth rates of above 4 percent were last
seen in 2010, when output expanded 5.1 percent as the financial
crisis eased.
    "Optimism is in the air, particularly in financial markets,
and some cautious optimism may indeed be justified," the IMF's
chief economist, Olivier Blanchard, said at a news conference.
    "Comparing to where we were at the same time last year,
acute risks have decreased," he said, noting that Washington had
largely dodged the "fiscal cliff" of tax hikes and spending cuts
that were seen as a risk to growth and that policy actions in
Europe had helped calm the region's debt crisis.
    Still, the IMF warned that big downside risks remain,
including that the euro zone's crisis could flare anew and the
U.S. Congress could tighten the budget excessively.
    "We may have avoided the cliffs, but we still face high
mountains," Blanchard said.
    Christine Lagarde, the IMF's managing director, speaking at
the World Economic Forum in Davos, Switzerland, said the global
economic recovery is still weak and uncertainty still high. She
urged global finance leaders to keep up the momentum on policy
changes to put uncertainty to rest, saying that "2013 will be a
make-or-break year."
    The United States is due to run out of borrowing room under
a self-imposed limit of $16.4 trillion sometime between
mid-February and early March, and it still faces steep automatic
spending cuts on March 1 absent action.
    The U.S. House of Representatives on Wednesday passed a bill
that suspends the debt limit until May 19, a move that is likely
to defuse immediate fears of a damaging U.S. debt default though
not removing a longer-term threat.
   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
    For advanced economies as a whole, the IMF said activity
would likely remain weak this year with growth of just 1.4
percent, before strengthening to 2.2 percent in 2014. Blanchard
said growth would be too tepid this year to lower unemployment
in advanced economies.
    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.
    In Japan, the IMF said the 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 monetary policy
easing and a "credible" medium-term plan to tighten its budget.
    Blanchard dismissed reports that easy monetary policy in
advanced economies risked sparking a "currency war."
    "I think this increasing talk of currency wars is very much
overblown," Blanchard said, also dismissing reports of a sea
change in emerging market capital flows. 
    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 notched in 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
region.
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