IMF cuts global 2013 growth forecast to 3.6%

The IMF's pessimism is due to worries about the future of the eurozone and incorrect US fiscal policies.

"The recovery has suffered new setbacks, and uncertainty weighs heavily on the outlook. A key reason is that policies in the major advanced economies have not rebuilt confidence in medium-term prospects. Tail risks, such as those relating to the viability of the euro area or major US fiscal policy mistakes, continue to preoccupy investors,” says IMF Chief Economist Olivier Blanchard in the World Economic Outlook published at the IMF's annual meeting in Tokyo yesterday.

The IMF again cut its 2012 global growth forecast to 3.3% from its previous forecast of 3.5% in April, and cut its 2013 forec\st to 3.6% from 3.9%. The IMF also warned that the chances of another slowdown have increased, and that there is 1:6 chance that growth will slow to less than 2%, due to a recession in development markets and slow growth in emerging markets.

The revised growth forecast in the October 2012 World Economic Outlook, is substantially worse than the April forecast, including reduced forecasts for peripheral economies in Europe, Asia, and Latin America in 2013. Blanchard predicts that the euro area will have minus 0.4% growth in 2012, with deep recessions and double-digit unemployment rates in Italy, Spain, Portugal, and Greece. Although he predicts 0.4% growth for Europe in 2013, the improvement is far less than predicted in the first half of 2012.

Blanchard predicts 2.1% growth for the US in both 2012 and 2013, and he expects that the UK economy will see 0.4% contraction in its economy in 2013 and more than 1% growth in 2013.

The IMF warns that unemployment will stay high worldwide, and that the financial situation will remain fragile. "The World Economic Forecast forecast rests on two crucial policy assumptions. The first is that European policymakers - consistent with the GFSR’s baseline scenario - will adopt policies that gradually ease financial conditions further in periphery economies. In this regard, the European Central Bank (ECB) has recently done its part. It is now up to national policymakers to move and activate the European Stability Mechanism (ESM), while articulating a credible path and beginning to implement measures to achieve a banking union and greater fiscal integration. The second assumption is that US policymakers will prevent the drastic automatic tax increases and spending cutbacks (the fiscal cliff) implied by existing budget law, raise the US federal debt ceiling in a timely manner, and make good progress toward a comprehensive plan to restore fiscal sustainability. The WEO forecast could once again be disappointed on both accounts."

The IMF welcomes recent measures, including liquidity injections into financial systems, which have helped boost growth and reduce unemployment. But it believes that these positive effects will wane, and notes that efforts to reduce large budget deficits have not boosted growth, and actually lowered it, while causing high uncertainty and a weak financial sector.

On the policy side, the IMF says that building credible fiscal policies in the medium term, and preventing worst-case scenarios are key challenges. As for Europe, which the IMF says the main threat to the global economy, it welcomes measures by the ECB and advises that the ESM should intervene in national banking systems and support governments. The IMF says that this will require fiscal and monetary union, including a uniform European financial framework.

The IMF says that without progress, the improvement and recovery will be harmed, and it criticizes patchwork policies for tightening financial regulations, which it says are inadequate.

As for imbalances in the global economy, the IMF says that there has been improvement, but that there is still much to do, including current account surpluses by Germany and the Netherlands in contrast to countries on Europe's periphery, and a too strong US dollar, euro, and Japanese yen compared with the currencies of emerging countries.

The IMF is optimistic about Israel, forecasting 2.9% growth in 2012 and 3.2% growth in 2013. It also predicts that Israel's unemployment rate will be 7% in 2012 and 2013.

Published by Globes [online], Israel business news - - on October 9, 2012

© Copyright of Globes Publisher Itonut (1983) Ltd. 2012

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