By Nick Mann | 9 October 2012
The International Monetary Fund has downgraded its economic growth forecasts for the global economy as deficit reduction policies and the still weak-banking system weigh down on the prospects of the advanced economies.
In its latest World economic outlook, published this morning, the IMF said it now expected the world economy to grow by 3.3% this year and 3.6% in 2013, compared with 3.5% and 3.9% respectively in its previous forecast in July.
Economic growth in the world’s leading economies is now expected to be 1.3% this year and 1.5% in 2013 – down from the 1.4% and 1.8% previously forecast.
IMF chief economist Olivier Blanchard explained that although fiscal consolidation was needed, there was ‘no question’ it was weighing down on demand, and that government spending changes were having a significant impact on national income.
At the same time, he said, the financial system was still not functioning efficiently. ‘In many countries, banks are still weak, and their positions are made worse by low growth. As a result, many borrowers still face tight borrowing conditions,’ he added.
According to the IMF, policies in the major advanced economies have failed to rebuild confidence in the prospects for the global economy. Concerns over the future of the eurozone and the potential for massive tax rises and spending cuts in the US – the ‘fiscal cliff’ – are weighing heavily on investors.
Output will remain ‘relatively solid’ in many emerging market and developing economies, but the IMF still downgraded its forecasts for that grouping as well. They are now expected to increase output by 5.3% this year and 5.6% in 2013, compared with 5.6% and 5.8% forecast in July.
Blanchard said: ‘Low growth and uncertainty in advanced economies are affecting emerging market and developing economies through both trade and financial channels, adding to home-grown weaknesses.’
The ‘weakening’ global growth outlook and increasing downside risks mean that fiscal consolidation remains ‘challenging’, the fund said in its latest Fiscal monitor, also published today.
Most countries have made substantial progress in reducing their fiscal deficits, with about half of those covered by the IMF’s analysis expected to record deficits next year that are either the same level or less than pre-economic crisis levels.
It warned, however, that countries’ efforts to reduce their overall debt levels were taking longer to yield results. ‘Debt ratios peaked early in emerging market economies but are not expected to stabilise before 2014/15 in many advanced economies,’ it said. ‘The slower progress in advanced economies is due to the magnitude of the shock and the sluggishness of the recovery thereafter, but in some cases also to high interest rates, which are negatively affected by policy uncertainties and banking fragilities.
‘In many advanced economies, consolidation efforts will need to persist for many years if debt ratios are to be restored to pre-crisis levels,’ it added.
The IMF urged governments to ‘tread the narrow path’ that allows them to strengthen their public finances while avoiding withdrawing the fiscal support needed to support the economic recovery.
Countries with room for manoeuvre could slow their fiscal adjustment if growth slows, but the IMF said that ‘short-term caution should not be an excuse to slow or delay efforts to put public finances on a sounder footing over the medium term, as this remains a key requirement for growth.
‘Even countries with relatively comfortable fiscal positions should maintain appropriate buffers to be able to confront future shocks.’
