The International Monetary Fund, unimpressed with the policy actions taken to stem the European sovereign debt crisis, on Monday cut its forecast of growth in 2013.
In a periodic update of its economic forecast, the Washington-based institution warned that the measures taken in Europe have not done enough to quiet markets and restore growth.
The International Monetary Fund maintained its forecast of 2012 economic growth at 3.5 per cent, but it cut its forecast of growth in 2013 to 3.9 per cent, down from the estimate of 4.1 per cent it made in April. In 2010, the world economy expanded 5.3 per cent.
The IMF cautioned that even those tepid forecasts might be too optimistic, if Europe does not do enough to ameliorate its debt crisis and if policies to improve growth in emerging markets fail to gain traction.
“Clearly, downside risks continue to loom large, importantly reflecting risks of delayed or insufficient policy action,” the fund warned.
Countries experiencing the biggest reductions in expected growth include Brazil and India, whose economies have cooled this year; newly industrialised Asian economies, like Korea and Singapore, hit by a broader global slowdown; and Britain, struck by austerity budgeting.
Prospects in high-income countries outside the Euro zone and in emerging markets have dimmed, José Viñals, the head of the IMF’s monetary and capital markets department, said in prepared remarks. “This has left them more vulnerable to spillovers from the euro area. It also reduces their ability to address homegrown fiscal and financial vulnerabilities.”
The fund had stern words for American policy makers: Avoid the “fiscal cliff” and lift the debt ceiling promptly, for the sake of the US economy as well as the world’s.
The IMF estimated that a failure to extend some of the (George) Bush tax cuts and to reverse some of the automatic, across-the-board government spending cuts looming at the end of the year would cause the economy to stall on the brink of recession, “with significant spillovers.”
It warned American policy makers that the country could experience considerably higher borrowing costs if they do not create a plan to reduce the country’s deficits in the medium term as well.
The fund’s economists also noted the adverse market reaction caused by the brinksmanship over the debt ceiling last year in a separate analysis of the global capital markets.
Policy makers should raise the statutory borrowing limit “well ahead of the deadline” in order to “mitigate risks of financial market disruptions and a loss in consumer and business confidence,” they warned.
“Uncertainties about the fiscal outlook in the United States present a particular latent risk to global financial stability,” Viñals said.
The IMF reduced its estimates of American growth in 2012 and 2013 by a tenth of a percentage point, anticipating that the economy will expand just 2 per cent this year. It warned that the recovery had seemed to experience an “underlying loss of momentum” recently. But it said that “distortions” from seasonal adjustment and “payback” from the unusually warm winter — which drew economic activity forward from the spring — seemed to be part of the explanation.
As has become usual in recent years, the fund saved its starkest warnings for Europe. It said that the flood of cheap euro loans offered by the European Central Bank — the long-term refinancing operations — had eased the crisis this year.
But yields have started spiralling upward again in countries including Spain and Italy, making further European bailouts seem a near inevitability, destabilising the global financial markets and suppressing growth on the Continent.
Europe needs a stronger banking union, including a cross-Continental guarantor of deposits; structural reforms to improve growth prospects; more monetary easing; and better plans for budget-cutting in the countries struggling to convince global investors of their financial stability, the fund said.
“The utmost priority is to resolve the crisis in the euro area,” its economists wrote. “The recent agreements, if implemented in full, will help to break the adverse links between sovereigns and banks and create a banking union.”
The news was not all bad. The fund said that global growth figures had come in surprisingly strong in the first three months of the year, even as the United States entered a sharper slowdown than many economists had expected.
Financial markets had responded positively to measures taken by the European Central Bank to shore up European financial institutions, for one, and global trade and industrial production had turned up, helping countries including Germany and some big Asian exporters. The significant decline in oil prices also helped bolster growth around the world and ease inflationary pressures.
