The IMF cut its global growth forecast for 2011 and 2012 on Tuesday (September 20th), saying that the economic recovery has become much more uncertain than anticipated earlier this year.
“The global economy is in a dangerous new phase,” the Washington-based international financial institution said in its latest World Economic Outlook (WEO) report. “Global activity has weakened and become more uneven, confidence has fallen sharply recently, and downside risks are growing.”
In June, the Fund said that it expected the world economy to grow by 4.3% in 2011 and by 4.5% in 2012. On Tuesday, it lowered its forecasts to 4% for both years, down from 5% in 2010.
The global economy is affected by the influence of two adverse developments — a much slower recovery in the advanced economies this year and a large increase in fiscal and financial uncertainty, especially in recent months. The combination and interactions of these two negative factors make things even worse, the IMF said in its new report.
“Strong policies are urgently needed to improve the outlook and to reduce the risks,” IMF Chief Economist Olivier Blanchard warned at the presentation of the new WEO report on Tuesday. “Only if governments move decisively on fiscal policy, financial repairs, and external rebalancing, can we hope for stronger and more robust recovery.”
But, if Western leaders fail to take swift action, there is a real risk of a return to recession, the Fund stressed.
The new report cut the growth forecasts for the Eurozone to 1.6% in 2011 and 1.1% in 2012, down from its June projections of 2% and 1.7%, respectively. Two of the countries in the common currency area — Greece and Portugal — will experience negative growth. The Greek economy is expected to shrink 5% this year and 2% in the next, while the Portuguese will contract by 2.2% in 2011 and 1.8% in 2012.
Voicing concern about the lingering debt crisis in the Eurozone, the IMF urged policy makers in the 17 member states to take the necessary steps.
They “must swiftly ratify the commitments made at the July summit, and in the meantime, the European Central Bank must continue to intervene strongly to maintain orderly conditions in sovereign debt markets,” the IMF said. “Leaders must stand by their commitments to do whatever it takes to preserve trust in national policies and the euro.”
Senior IMF economist Jorg Decressin said on Tuesday that Greece’s debt problems were “eminently manageable”. Criticising speculation about the Balkan nation’s possible exit from the Eurozone, he also slammed any talk that the area could break up as a “crazy proposition”.
According to Fund experts, the Turkish economy will expand by 6.6% this year, posting the highest growth among 14 Central and Eastern European economies, but will fare worse next year, when it is expected to see a real GDP growth of 2.2%.
Croatia is the country within this group that is expected to expand the least this year, with its growth rate projected at 0.8%.
The IMF cautioned, however that its new projections “rest on a number of assumptions: that European policymakers will be able to contain the euro area crisis to the so-called periphery countries, that US policymakers strike a judicious balance between support for the economy and medium-term fiscal consolidation, and that ups and downs in global financial markets don’t get worse”.
If they are not met, “global growth will be much lower,” it warned.