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IMF cuts world growth forecast

  • Published at 06:37 am April 17th, 2013
IMF cuts world growth forecast

The IMF cut its world growth forecast for 2013 yesterday as the euro zone recession continued to drag, but predicted that growth overall would pick up in the second half of the year.

In its newest assessment of the global economy, the International Monetary Fund( IMF) said world output would expand by 3.3% this year, compared to the 3.5% it predicted in January.

That left the pace of the world economic expansion virtually flat from 2012's 3.2%, with slower-than-expected growth in the United States and prolonged stagnation in the euro area the key reasons behind the downgrade.

The global crisis lender said that short-term risks still loomed especially in the euro zone, where Cyprus's fresh bailout and Italy's weaknesses could still spark fresh setbacks.

But it also saw growth slower in large emerging economies like Russia, China, Brazil and India, underscoring the global sense of economic weakness.

“Global prospects have improved again but the road to recovery in the advanced economies will remain bumpy,” the IMF said in its World Economic Outlook.

“In the medium term, the key risks relate to adjustment fatigue, insufficient institutional reform, and prolonged stagnation in the euro area as well as high fiscal deficits and debt in the United States and Japan.

“In this setting, policymakers cannot afford to relax their efforts.”

With immediate crises out of the way, the Fund stuck close to its previous estimate for global growth in 2014, predicting a 4.0% expansion, “assuming that policymakers avoid setbacks and deliver on their commitments.”

Generally prospects were better since last year after two of the largest short- term threats to the global recovery were defused: the threat of a breakup of the eurozone and a potentially sharp contraction in the United States driven by extreme budget cuts and tax hikes.

Even so, the two giant economies continue to drag. US growth was forecast at 1.9 percent this year, due to larger-than- expected government spending cuts, and the eurozone was expected to contract 0.3 percent.

"The forecast for negative growth in the euro area reflects not only weakness in the periphery but also some weakness in the core. Germany's growth is strengthening but is still forecast to be less than 1 percent in 2013," said Olivier Blanchard, the IMF's chief economist.

In the eurozone, the IMF said, even though conditions have eased for the government finances of struggling economies, that improvement is not passing through to businesses and households, “because banks are still hobbled by poor profitability and low capital, constraining the supply of credit.”

The single-currency area presents the principal short-term risk to global growth, the IMF said, citing especially “uncertainty about the fallout from events in Cyprus and politics in Italy as well as vulnerabilities in the periphery.”

Among leading economies, Japan is the one bright spot, its IMF-approved effort to reflate the economy with aggressive monetary easing leading to an upgrade of its growth prospects this year, to 1.6 percent from the previous estimate of 1.2% though Japan's huge debt load riased questions of sustainability.

Among emerging economies, the IMF lowered its 2013 forecast for China's growth by 0.1% point to 8.0%still better than 2012's pace -- and Brazil by 0.5% points to 3.0%.

On Monday, Beijing said growth in the first quarter ran a lower-than- expected pace of 7.7% fueling fears that a rebound in the world's number-two economy is faltering on weak overseas demand.

Asia and Sub-Saharan Africa remain supported by resilient domestic consumer demand, and should improve if growth in the eurozone, US and other advanced economies picks up.

But the Middle East-North Africa region is still struggling with political reforms, and inflation and foreign exchange market pressures are setting tough challenges in some Latin American countries, the IMF said.

The IMF said the “bumpy” progress of the advanced economies was making it difficult for developing countries themselves to get traction as well as to manage gushes of capital and upward pressure on currencies.

Although worldwide inflation was generally under control, it warned advanced-economy central banks stoking their markets with liquidity to remain on guard for a change in price expectations.

However, it said, growing complaints about competitive exchange rate devaluations “appear overblown.”

“The US dollar and the euro appear moderately overvalued and the renminbi moderately undervalued. The evidence on valuation of the yen is mixed.”

“The challenge for recipient countries is to accommodate the underlying trends while reducing the volatility of the flows when they threaten macro or financial stability.”

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