IMF say global economy healthier, but still weak

WASHINGTON Tue Oct 8, 2013 1:13pm EDT

1 of 4. People walk outside the International Monetary Fund headquarters at the start of the annual IMF-World Bank fall meetings in Washington, October 8, 2013.

Credit: Reuters/Jonathan Ernst

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WASHINGTON (Reuters) - The International Monetary Fund expressed guarded optimism about the state of the global economy on Tuesday, even as it trimmed its forecasts for output and warned about the catastrophic impact of a potential U.S. debt default.

In its latest global economic snapshot, the IMF cut its world growth forecasts for the sixth straight time in less than two years, saying a stronger performance in most advanced economies would fail to make up for a more sluggish expansion in the developing world.

Prospects for emerging markets, long the engine of the global recovery, have dimmed somewhat with both structural and cyclical factors at play, the IMF said.

The IMF now expects global output to expand just 2.9 percent this year, down from its July estimate of 3.1 percent, making it the slowest year of growth since 2009. It sees a modest pickup next year to 3.6 percent.

"Although the global growth number is not impressive, I think the news on net is rather good. Those countries which were sick are less sick than they were," the IMF's chief economist Olivier Blanchard told reporters, referring to rich nations.

"And the others are slowing down, but I wouldn't call this sickness," he said in a reference to emerging markets.

The United States is driving much of the global recovery and U.S. output should pick up further next year - as long as politics do not get in the way, the IMF said.

Blanchard warned that a failure by the U.S. Congress to quickly raise the nation's $16.7 trillion debt ceiling could tip the world's largest economy into a deep downturn that would be felt around the globe.

"The effects of any failure to repay the debt would be felt right away, leading to potentially major disruptions in financial markets," he said. "It could well be that what is now a (U.S.) recovery would turn into a recession or even worse."

He said, however, that such an event did not appear likely.

The IMF forecasts showed emerging markets still accounting for much of global growth, with their economies forecast to expand nearly four times as fast this year as advanced economies. But the IMF said the heady expansions some have enjoyed may be a thing of the past.

China in particular should slow over the medium term as its economy transitions away from investment as a driver to consumption, the Fund said. Lower growth in the world's second-largest economy could spill over to others, especially commodity exporters dependent on China's hunger for energy, it added.

RISKS FROM FED EXIT

The IMF also highlighted the risk of tighter financial conditions as markets prepare for the end of ultra-loose U.S. monetary policy.

Blanchard said it was time for the U.S. central bank to prepare for an exit from its massive bond-buying program, but he warned the transition could be difficult for financial markets.

"The communication problems facing the Federal Reserve are new and delicate," he wrote in a foreword to the IMF's report. "It is reasonable to expect some volatility in long rates as Fed policy shifts."

In the United States, a tighter fiscal policy should shave 2.5 percent from output this year, the Fund said. But a recovery in real estate should contribute to economic growth of 2.6 percent next year, barring any more fiscal crises, it said.

The IMF said Japan had experienced an 'impressive' pickup since the government launched a massive stimulus program to spur the economy out of a prolonged stagnation, boosting output by about 1 percent. But growth should slow next year as the stimulus recedes and Japan moves ahead with higher consumption taxes, it added.

In Europe, a better mood more than any change in policy lifted core economies such as Germany and France, and even Italy and Spain should edge into positive growth territory next year, the Fund said.

But it added that the euro zone must still address financial fragmentation, improve the health of banks, and move closer to banking union, as the IMF has urged in past reports.

Failure to address problems in Europe and the possibility of a surprisingly sharp tightening of financial conditions as the Fed withdraws from its massive bond-buying program may lead to medium-term global growth of only 3 percent, the IMF said.

That would be well short of the more than 4 percent growth it said it envisioned.

"Over time, worrisomely high public debt in all major advanced economies and persistent financial fragmentation in the euro area could then trigger new crises," it said.

(Additional reporting by Lucia Mutikani and Alister Bull; Editing by Krista Hughes and Andrea Ricci)

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Comments (3)
Lemming wrote:
Council of Foreign Relations, Trilateral Commission, Bilderberg Group, Club of Rome, United Nations, World Bank, and the International Monetary Fund.

“Their aim is nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. The system was to be controlled in a feudalistic fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent private meetings and conferences.” (Carroll Quigley, Tragedy and Hope (New York: The Macmillan Co., 1966)

Oct 08, 2013 10:56am EDT  --  Report as abuse
keebo wrote:
How is debt discouraged when the central banks keep printing money in order to encourage it.

Oct 08, 2013 11:51am EDT  --  Report as abuse
dareconomics wrote:
No one should act surprised that the IMF has cut its world growth forecasts for this year and next, because it has been doing so since 2011. Old economic models do not work in the New Normal and must be adjusted. Until this happens, these numbers will continue missing to the downside. At the present time, overstating economic growth is working out well for the IMF as it makes unsustainable sovereign debt loads seem reasonable so that it can continue wasting money on various Eurozone bailouts. Now let’s have a little fun. If anyone finds the last time the IMF succeeded in predicting a worldwide recession, please post the link in the comments. I won’t hold my breath.

Full post with charts, images and graphs:

http://dareconomics.wordpress.com/2013/10/08/around-the-globe-10-08-2013/

Oct 08, 2013 3:04pm EDT  --  Report as abuse
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