TOKYO — Plagued by uncertainty and fresh setbacks, the world economy has weakened further and will grow more slowly over the next year, the International Monetary Fund says in its latest forecast.
Advanced economies are
risking recession, the international lending organization said in a
quarterly update of its World Economic Outlook, and the malaise is
spreading to more dynamic emerging economies such as China.
The
IMF forecasts that the world economy will expand 3.3 percent this year,
down from the estimate of 3.5 percent growth it issued in July. Its
forecast for growth in 2013 is 3.6 percent, down from 3.9 percent three
months ago and 4.1 percent in April.
Underpinning that bleaker
scenario are the assumptions that Europe will continue to ease monetary
policy and that the U.S. will avert a crushing blow to growth by fending
off a so-called “fiscal cliff” that could result from a failure to
reach a compromise on its budget law and tax cuts.
Conditions could worsen if the United States doesn’t deal with its budget crisis soon, the IMF said.
“Downside
risks have increased and are considerable,” the fund said. It said its
forecasts are based “on critical policy action in the euro area and the
United States, and it is very difficult to estimate the probability that
this action will materialize.”
The IMF has urged the U.S. to
raise the ceiling on the level of debt the government can issue, which
is capped by law. In August 2011, a battle between the Obama
administration and Congress over raising the limit wasn’t resolved until
the U.S. almost defaulted on its debt.
Global efforts to ease
credit and increase the amount of money available for lending are
helping, but appear to be yielding diminishing returns, as are fiscal
stimulus policies, the IMF warned.
“Because uncertainty is high,
confidence is low, and financial sectors are weak, the significant
fiscal achievements have been accompanied by disappointing growth or
recessions,” it said.
Among other things, it says governments need
to do more to relieve the burden of household debt that is constraining
spending power and thus crippling demand.
While large corporations pay record low rates for credit, households and small companies struggle to obtain bank loans, it said.
Fortifying
domestic demand is all the more crucial given weakening trade trends.
The IMF forecasts that growth in world trade volume will slump to 3.2
percent this year from 5.8 percent last year and 12.6 percent in 2010.
“Low
growth and uncertainty in advanced economies are affecting emerging
market and developing economies through both trade and financial
channels, adding to homegrown weaknesses,” the IMF’s chief economist,
Olivier Blanchard, said in a statement.
But he told reporters
Tuesday a more optimistic scenario was possible if the right measures
are taken, such as fixing banks in European countries and reducing the
uncertainty about U.S. policies.
“The case for an upside scenario is stronger than it has been,” he said at the opening of the IMF meeting in Tokyo.
He
noted some positive signs in the U.S. economy such as a turnaround in
the housing market. The IMF also sees the slowdown in China as part of a
shift from the past double-digit growth to a rate that is
“sustainable,” a process he described as “a soft landing.” And the
slowdown in developed nations had pushed down exports, the key factor
behind the slowdown in China, Blanchard and other IMF officials said.
The
IMF raised the U.S. growth forecast slightly, to 2.2 percent this year
from 2 percent in July. For 2013, though, it expects U.S. growth of 2.1
percent, down from 2.3 percent.
Among the 17 nations that use the
euro, low growth in the major “core economies,” such as Germany and
France, will be offset by outright contractions in the smaller
economies, leading real gross domestic product to fall by about 0.4
percent in 2012, the IMF said.
It forecasts growth in the euro
area will stay flat in the first half of 2013 and tick up to about 1
percent in the second half of the year, the IMF said.
The report
was released just ahead of the World Bank-IMF annual meeting, which is
being held in Tokyo this week. The gathering of some 10,000 bankers,
executives and officials will likely refocus attention on Japan’s
failure to escape its own economic slump two decades after its own
financial implosion in the early 1990s.
The IMF said it expects
growth in Japan to hit 2.2 percent this year but to slacken further as
reconstruction from the March 2011 disasters winds down, falling to 1.2
percent in 2013.
Japan, whose population is both shrinking and
aging faster than elsewhere, is confronting problems of high debt and
stagnation, it said.
As usual, the bright spots are developing
economies that were less affected by the global financial crisis, where
rising employment and strong demand will help support growth, the IMF
said.
China’s economy will likely expand 7.8 percent this year,
down from July’s 8 percent forecast, though a pickup in construction
projects is expected to spur growth late in the year. India’s economy
will grow 4.9 percent, down from 6.1 percent. And Brazil’s growth will
be only 1.5 percent, compared to 2.5 percent.
The IMF advised
policymakers to devise stronger medium-term fiscal and structural
reforms to shore up confidence in the growth potential of the advanced
economies.
Only then, will investor confidence in markets and public debt be restored.
“Unless
governments spell out how they intend to effect the necessary
adjustment over the medium term, a cloud of uncertainty will continue to
hang over the international economy, with downside risks for output and
employment in the short term,” it said.
