The International Monetary Fund cut its forecast for US economic growth on Friday and warned Washington and debt-ridden European countries that they are ‘playing with fire’ unless they take immediate steps to reduce their budget deficits.
The IMF, in its regular assessment of global economic prospects, said bigger threats to growth had emerged since its previous report in April, citing the euro zone debt crisis and signs of overheating in emerging market economies.
The Washington-based global lender forecast that US gross domestic product would grow a tepid 2.5 per cent this year and 2.7 per cent in 2012.
In its forecast just two months ago, it had expected 2.8 per cent and 2.9 per cent growth, respectively. Overall, the IMF slightly lowered its 2011 global growth forecast to 4.3 per cent, down from 4.4 per cent in April. Its forecast for 2012 growth remained unchanged at 4.5 per cent. The IMF said it was slightly more optimistic about the euro area’s growth prospects this year, but a lack of political leadership in dealing with Europe’s debt crisis and the wrangling over budget in the US could create major financial volatility in coming months.
“You cannot afford to have a world economy where these important decisions are postponed because you’re really playing with fire,” said Jose Vinals, director of the IMF’s monetary and capital markets department. “We have now entered very clearly into a new phase of the (global) crisis, which is, I would say, the political phase of the crisis,” he said in an interview in Sao Paulo, where the updates to the IMF’s World Economic Outlook and Global Financial Stability Report were published.
In the United States, the political problems include a fight over raising the legal ceiling on the nation’s debt. A first-ever US default would roil markets and Fitch Ratings said even a “technical” default would jeopardize the country’s AAA rating. Olivier Blanchard, the fund’s chief economist, told reporters that while the risk of a double-dip recession in the US is small, growth is unlikely to be fast enough to quickly bring down the 9.1 per cent US unemployment rate.
The IMF said the outlook for the US budget deficit this year has improved somewhat due to higher-than-expected revenues. In a separate report, it forecast a deficit of 9.9 per cent of GDP – still high, but better than the deficit of 10.8 per cent of GDP it foresaw in April. Despite the relative improvement, Blanchard said financial markets were becoming increasingly worried by the lack of a ‘convincing’ plan in the United States and other countries to reduce their budget deficits.
“If you make a list of the countries in the world that have the biggest homework in restoring their public finances to a reasonable situation in terms of debt levels, you find four countries: Greece, Ireland, Japan and the United States,” Vinals said. Greece has edged closer to default as euro zone officials disagree on a planned second aid package for the indebted country.
With strikes and protests around the country, political turmoil has added to uncertainty, stoking fears that the government will not be able to tighten its belt enough to reduce crippling deficits. Fears of contagion in the euro zone have driven global stock markets lower in recent sessions. The IMF raised its growth view for the euro area in 2011 to 2.0 per cent from 1.6 per cent. For 2012, the IMF saw growth at 1.7 per cent, nearly stable from its previous 1.8 per cent. It raised its forecast for Germany, the powerhouse of the euro zone, to 3.2 per cent from 2.5 per cent, with growth moderating to 2 per cent in 2012.
Forecasts for large emerging markets remained stable or slipped. While China’s GDP view stayed at 9.6 per cent this year, the IMF lowered its forecast for Brazil to 4.1 per cent from 4.5 per cent in April. Those countries, along with Russia, India and South Africa, make up the fast-growing BRICS, a group of emerging economies whose brisk expansion has outstripped that of developed markets recently.
