By Steve Herman
The International Monetary Fund (IMF) is predicting a further slowdown in the global economy’s growth rate. The assessment comes in a closely-watched economic forecast in which the Fund blames the gloomy outlook on uncertainties with fiscal policies in the United States and Europe.
The IMF says there is an “alarmingly high” risk of a global slowdown with an 80 percent chance of recession in the Euro zone next year.
The global economy is predicted to rise 3.3% this year and 3.6% next year. In its previous forecast, three months ago, the IMF pegged growth this year at 3.5% percent and 3.9% in 2013.
“The new element is the uncertainty, the degree of uncertainty, about policy – both in Europe and in the United States,” said economist Olivier Blanchard, IMF’s research director. “That’s what worries us. At the same time it is sufficiently well identified that if the measures which have been promised are delivered in the case of Europe and if the U.S. avoids a fiscal cliff one can be optimistic or relatively optimistic about the future.”
The fund recommends that after next month’s presidential and congressional elections, America will have to act quickly or economic recovery will be derailed.
At the beginning of 2013, a number of significant tax cuts expire and automatic spending cuts go into effect unless U.S. policy-makers act.
While there is strong concern about Europe, the United States and Japan, the Fund also expects an economic slowdown in China and India, two countries whose economic booms helped the world recover from the most recent recession.
The latest IMF report cautions that overall “confidence in the global financial system remains exceptionally fragile.”
The IMF sees China continuing to be the primary driver of growth among developing Asia economies, as officials there accelerate approval of public infrastructure projects.
Economists warn some of those Chinese state investments are unsustainable and inefficient in the long term.
Ian Bremmer is president of the Eurasia Group, a New York-based political risk research and consulting firm. He acknowledges those concerns but contends China enjoys some protection because its present economy is fundamentally different.
“The Chinese have a massive surplus. If they want to continue to use it to support unprofitable ventures, they can do that. If the international markets don’t like what the Chinese are doing they cannot short them because the Chinese don’t have a banking system,” said Bremmer. “They can’t put pressure on the Chinese to do different things the way they can with the Spaniards, the Italians or even the French.”
The IMF forecast is more upbeat positive for sub-Saharan Africa, where regional growth is forecast to average above five percent, except for South Africa, which is hampered by its ties to Europe.
The International Monetary Fund, which has 188 member countries, warns of continued uncertainty in the Middle East and North Africa amid political and economic transitions in the aftermath of the Arab Spring. In that region, real GDP growth is forecast to slow to about 1.25% this year, but expected to rebound moderately in 2013.
The forecasts were issued as thousands of people, including central bankers, finance ministers and private sector executives gathered here for a week of meetings to discuss global economic issues.