WASHINGTON 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)