IMF trims global forecast as Europe continues to struggle
AN unexpectedly stubborn euro zone recession and weakness in Japan will weigh on global economic growth this year before a rebound in 2014 that should deliver the fastest expansion since 2010, the International Monetary Fund believes.
The IMF trimmed its 2013 forecast for global growth to 3.5pc from the 3.6pc it projected in October, but said it looked for a 4.1pc expansion in 2014 if a recovery takes a firm hold in the euro zone. It said the world economy grew 3.2pc last year.
Healthy global growth rates of above 4pc were last seen in 2010, when output expanded 5.1pc as the global financial crisis eased.
"Optimism is in the air, particularly in financial markets, and some cautious optimism may indeed be justified," IMF chief economist Olivier Blanchard said at a news conference.
"Comparing to where we were at the same time last year, acute risks have decreased," he said, noting that Washington had largely dodged its so-called "fiscal cliff" and that policy actions in Europe had helped calm the region's debt crisis.
Still, the IMF warned that big downside risks remained, including the possibility the euro zone's crisis could flare anew and the U.S. Congress could tighten the budget excessively.
"We may have avoided the cliffs, but we still face high mountains," Blanchard said.
The United States is due to run out of room under a self-imposed borrowing limit of $16.4 trillion sometime between mid-February and early March, and it also faces steep automatic spending cuts on March 1 absent action.
Republicans want to use the need to raise the debt ceiling to ensure government spending is cut. They have signaled a willingness to approve a nearly four-month extension of the debt limit that would defuse immediate fears of a damaging U.S. debt default but keep a longer-term threat alive.
The IMF said the U.S. economy was set to expand 2 pc this year, with growth rising above trend in the second half of this year and reaching 3 pc in 2014.
"The priority is to avoid excessive fiscal consolidation in the short term, promptly raising the debt ceiling, and agree on a credible medium-term fiscal consolidation plan, focused on entitlement and tax reform," it said.
POLICY CHALLENGES FOR EUROPE, JAPAN
For advanced economies as a whole, the IMF said activity would likely remain weak this year with growth of just 1.4 pc, before strengthening to 2.2 pc in 2014. Blanchard said growth would be too tepid this year to lower unemployment in advanced economies.
The IMF said a prolonged stagnation in the euro zone is a threat, especially if the currency bloc fails to complete fiscal and banking reforms.
The IMF said Japan's economy is likely to manage 1.2 pc growth this year, helped by fiscal stimulus, an easing of monetary policy and a weaker yen, But it warned that growth was likely to slow to 0.7 pc in 2014.
It urged Tokyo to adopt a more ambitious easing of monetary policy and a "credible" medium-term plan to tighten its budget.
Meanwhile, growth in emerging and developing economies should strengthen to 5.5 pc this year and 5.9 pc in 2014, the IMF said, adding that supportive policies had helped boost growth although weak demand from trading partners would still be a problem.
The pace of growth in China was set to increase to 8.2 pc this year and 8.5 pc in 2014, up from 2012 but still lower than the 10 pc growth rates of 2010, the fund said.
Developing Asia, including China and India, will remain the fastest-growing region in the world, according to IMF forecast, with growth of 7.1 pc this year and 7.5 pc in 2014.
Africa, with growth likely around 5.8 pc this year and 5.7 pc next year, is the world's second-fastest growing.
Lesley Wroughton, Telegraph.co.uk