Dark clouds ahead

10 October 2012

WASHINGTON - The International Monetary Fund (IMF) said yesterday that the risks of "a serious global slowdown are alarmingly high", with an 80-per-cent chance of recession in the euro zone next year, 25 per cent in Japan and 15 per cent in the United States.

In its bleakest assessment of global growth prospects since the 2009 recession, the IMF blamed policy uncertainty in the US and Europe for its gloomy position in a quarterly update of its World Economic Outlook.

It now foresees global growth of 3.3 per cent this year and 3.6 per cent in 2013, down from 3.5 per cent this year and 3.9 per cent next year in its last report in July.

Financial market stress, government spending cuts, stubbornly high unemployment and political uncertainty continue to dampen growth in high-income countries, the IMF said.

At the same time, the emerging-market countries that fuelled much of the recovery from the global recession, such as China and India, have continued to cool off, with global trade slowing.

"The recovery has suffered new setbacks, and uncertainty weighs heavily on the outlook," the IMF said, warning that its forecasts might be overly optimistic if policy makers in Europe and the US fail to carry out pro-growth policies. "Downside risks have increased and are considerable."

The latest report focused on the higher-income countries whose political and economic troubles are posing significant risks to the rest of the world. The IMF estimated that these advanced economies, including the United States and Germany, would grow about 1.3 per cent this year, down from 1.6 per cent last year.

Growth prospects were upgraded for only one major nation. The IMF projected the US would grow 2.2 per cent this year, 0.1 percentage point higher than previously estimated.

The 17-country euro area economy will contract 0.4 per cent this year, 0.1 percentage point worse than the forecast in July, and grow 0.2 per cent in 2013, less than the 0.7 per cent predicted three months ago, the IMF said.

"Low growth and uncertainty in advanced economies are affecting emerging market and developing economies through both trade and financial channels, adding to homegrown weaknesses," said Mr Olivier Blanchard, the IMF's Chief Economist.

But he told reporters yesterday a more optimistic scenario was possible if the right measures were taken, such as fixing the banks in European countries and reducing the uncertainty about US policies.
The IMF report called for US policymakers to find an alternative to planned automatic tax increases and spending cuts that would trigger a recession.

Europeans must follow on their commitments for a more integrated monetary union, and many emerging markets can afford to cut interest rates or pause tightening to fight off risks to their economies, the IMF said.

Emerging markets are expected to grow four times as fast as advanced economies at 5.3 per cent this year and 5.6 per cent next year, but the IMF took a sharp knife to its estimates for India.

India's economy may grow 4.9 per cent this year and 6 per cent next year, lower than previous forecasts of 6.2 per cent and 6.6 per cent respectively. China's estimate was cut by 0.2 percentage point each year to 7.8 per cent last year and 8.2 per cent in this year.

Under the IMF's definition, global gross domestic product does not have to shrink for the world to be in recession. The IMF defines recession as a decline in real per-capita GDP, along with weaknesses in other indicators including industrial production, trade, capital flows and joblessness. Agencies