Europe needs to “get its act together” and deal with its worsening sovereign debt crisis, the International Monetary Fund said on Tuesday, warning of the risk of severe global repercussions. The IMF said both Europe’s debt woes and a painfully slow recovery in the United States could undermine global growth, and it warned that without action those economies could tip back into recession.
The top economist at the global lender, however, singled out Europe as “a major source of worry” as he released the IMF’s latest World Economic Outlook report. “There is a wide perception that policymakers are one step behind markets,” IMF chief economist Olivier Blanchard told reporters. “Europe must get its act together,” he added. The IMF cut its 2011 and 2012 global growth forecast to 4 percent, slashing projections for almost every region of the world and saying risks remained tilted to the downside. Just three months ago it had projected an expansion of 4.3 percent for 2011 and 4.5 percent for 2012. The IMF’s message to European leaders was that they should do whatever it takes to preserve confidence in national policies and the euro, and it urged the European Central Bank to lower interest rates if risks to growth persisted. Investors have questioned Europe’s ability to come up with a convincing solution to its festering sovereign debt crisis, which has rattled confidence and roiled financial markets.
Finance officials from around the world gather in Washington later this week for semiannual meetings of the IMF and World Bank, but they appear to have no clear road map for how to deal high debt levels and a creaky global recovery. At the center of Europe’s crisis stands Greece, which has vowed to shrink its public sector and improve tax collection to avoid running out of money within weeks, hoping global lenders release a fresh tranche from an emergency loan. Senior IMF economist Jorg Decressin said Greece’s debt problems were “eminently manageable” and its government was fully committed to staying in the euro zone. He also dismissed talk of a possible euro zone break up. “I still think it’s a crazy proposition to think about, a break up of the euro area,” he told reporters.
Keeping pressure on European leaders, Standard & Poor’s on Monday downgraded its ratings on Italy by one notch and kept its outlook on negative.
WEAK AND BUMPY RECOVERY:
The fund cut its growth forecast for the 17-nation euro zone by nearly half a percentage point to 1.6 percent in 2011 and even weaker conditions are seen for next year with growth of just 1.1 percent. Currently the single currency region is scarcely growing at a 0.25 percent annual rate. The IMF cautioned that hasty budget cuts in the United States could further weaken growth, and it said the U.S. Federal Reserve should stand ready to ease monetary policy further. The Fed meets on Tuesday and Wednesday.
The IMF shaved its forecasts for U.S. growth to 1.5 percent for 2011 and 1.8 percent for 2012, down from June projection of 2.5 percent and 2.7 percent, respectively. Japan’s economy was forecast to shrink 0.5 percent this year, not quite as severely as previously thought, but to grow just 2.3 percent in 2012. In June, the IMF said Japan would likely grow 2.9 percent next year.
Taken together, advanced economies, including the United States, euro zone and Japan, were forecast to expand 1.6 percent this year and 1.9 percent next year. That marks sharp downward revisions from June’s 2.2 percent and 2.6 percent projections. The outlook, it said, was for a “weak and bumpy expansion”
The IMF also said prospects for emerging market economies were growing more uncertain, although growth would likely remain fairly strong at about 6.4 percent this year, slowing to 6.1 percent in 2012.
Signs of overheating still warranted close attention in emerging market economies, it cautioned. In some countries, higher commodity prices and social and political unrest loomed large, it added. The fund trimmed its forecasts for China and other emerging Asian economies, in part due to slowing global growth. Asian “growth remains strong, although it is moderating with emerging capacity constraints and weaker external demand,” the IMF said. It said it expects China’s economy to grow 9.5 percent in 2011 and 9.0 percent in 2012. That’s down from its June forecasts of 9.6 percent this year and 9.5 percent in 2012.
