The global economy has entered “a dangerous new phase”, with a recovery that is much weaker than was predicted just months ago, the International Monetary Fund warned on Tuesday.
Cautioning that Western economies could very well fall back into recession – with serious knock-on effects for the rest of the globe – the IMF cut its growth forecasts for the global economy to 4.0 percent for 2011 and 2012.
“The global economy has entered a dangerous new phase. The recovery has weakened considerably, and downside risks have increased sharply,” the IMF’s chief economist, Olivier Blanchard, said at a news conference.
“Strong policies are needed both to improve the outlook and to reduce the risks.” In its twice-yearly World Economic Outlook report, the IMF predicted growth would be patchy across the developed and developing world.
The global economy, which rebounded in 2010 following the 2008-2009 Great Recession, has been dragged down by persistent debt and deficit problems in advanced economies, particularly the United States and the eurozone, it said. Emerging market economies that have been the recovery’s driving force, such as China and India, will not escape unscathed from the weakness in the advanced economies, the Washington-based lender said.
“Many emerging economies need to make faster progress in strengthening fiscal fundamentals before cyclical factors or spillovers from advanced economies… turn against them,” it said in an accompanying analysis.
“Anemic” consumption in advanced economies and spiking financial volatility over worries about US and eurozone public debt have put the brakes on growth, originally forecast a half percentage point higher for this year. The slowdown in advanced economies was “a development we largely failed to perceive as it was happening”, Blanchard acknowledged. The US, the world’s largest economy, suffered the most notable downgrade. For emerging and developing economies, the IMF said capacity constraints, policy tightening and slowing foreign demand would result in slightly slower growth of 6.1 percent in 2012.