IMF cuts growth forecast but risks seen abating

The IMF downgraded slightly its global growth forecasts for this year and the next but said the main risks have receded

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The International Monetary Fund’s World Economic Outlook projects a gradual recovery for this year, but forecasts on the expansion of the global output were downgraded by 0.1 percentage points to 3.5% for 2013 and 4.1% for 2014 compared with the previous outlook released last October.

The forecast for advanced economies was cut by 0.2 percentage points to 1.4% for this year, while emerging and developing countries are expected to grow 0.1 percentage point slower, by 5.5%.

The US is forecast to grow by 2% in 2013, as the “supportive financial market environment” and “the turnaround in the housing market” will boost consumption, the IMF said in a statement.

The risk posed by the dispute regarding the debt ceiling and fiscal adjustment in the US has diminished, according to Olivier Blanchard, economic counselor and director of the IMF Research Department.

“I think the risk is much less. Avoiding the fiscal cliff was big,” Blanchard said in a video posted on the IMF website. “Even on the worst assumptions, there is not going to be anything crazy done on fiscal consolidation in 2013.”

The eurozone crisis is not as acute as it used to be but it could still put the recovery in jeopardy. The IMF noted that activity in the periphery eurozone was “even softer than expected,” with some of the weakness spilling into the core of the single currency area.

“Is Europe on the mend? I think the answer is yes and no,” Blanchard said.

Among the good news out of Europe, he noted institutional progress which he said was “quite impressive” and improvement in financial markets such as spreads decreasing, interest rates at a lower level for many borrowers and stock markets rising.

“The problem is... the real economy,” Blanchard said. “And there, the numbers are bad. There is no growth in the core, negative growth in the periphery, at least that’s what we’re predicting. Something has to happen to start growth.”

EMERGING MARKETS ‘ARE FINE’

The IMF cut its growth prediction for the euro area by 0.3 percentage points to forecast a contraction of 0.2% for this year.

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If momentum for reform is not maintained in the eurozone, the risk of a “prolonged stagnation” will rise, the IMF warned. Further steps towards banking union and fiscal integration, as well as continuing fiscal adjustment by the periphery countries, are among the reforms needed.

The IMF left its forecast for Japan’s growth unchanged at 1.2% for this year.

The Bank of Japan doubled its inflation target to 2% and made an open-ended commitment to asset buying, after the government announced a boost in public spending of 10.3 trillion yen ($114.5 billion).

Blanchard welcomed the raising of the inflation target and the “much more aggressive” monetary policy but said fiscal expansion, while it would help growth, it would also increase risks.

“When you start with such a level of debt and without medium-term credible fiscal consolidation plan, increasing the fiscal deficit in the short run is a very risky thing to do,” he said.

Emerging markets were on a much stronger footing, although their growth prospects have slid too. Among the BRICs, China was the only one whose forecast remained unchanged, at 8.2% for this year. Russia’s growth outlook was downgraded by 0.2 percentage points to 3.7%, India’s by 0.1 percentage points to 5.9% and Brazil’s by 0.4 percentage points to 3.5%.

“It’s not the rates [of growth] that we saw before the crisis, but these rates are long gone. These countries will have lower growth than they had but things, in general, are fine,” Blanchard said.