IMF Says Global Slowdown Could Be ‘More Lasting’

Confidence in world’s financial system still ‘exceptionally fragile’

The International Monetary Fund (IMF) cut its forecast for global economic growth, saying that the slowdown could have a “more lasting component” and that there was a very shaky confidence in the global financial system.

Bloomberg reported Tuesday that the IMF trimmed its expectations for growth of the world’s economy to only 3.3%, and said that the figure would be even lower unless the U.S. and Europe successfully deal with their own fiscal woes. In July the IMF had foreseen growth of 3.5% for this year and had predicted 3.9% for 2013; the new outlook sees 2013 growth coming in at 3.6% instead.

The IMF also said there are“alarmingly high” risks that the economy will slow at an even faster rate, and added that there was a one-in-six possibility that growth would drop below 2%.

In its World Economic Outlook report, the IMF said, “A key issue is whether the global economy is just hitting another bout of turbulence in what was always expected to be a slow and bumpy recovery or whether the current slowdown has a more lasting component.” It went on to say, “The answer depends on whether European and U.S. policymakers deal proactively with their major short-term economic challenges.”

World Bank President Jim Yong Kim, speaking at a forum in Seoul, said Tuesday that he saw some encouraging indications in Europe. But IMF Chief Economist Olivier Blanchard pointed out that the yields on Spanish and Italian bonds could move upward in the absence of bailouts for both countries. Yields had fallen after the European Central Bank (ECB) had announced a plan to buy unlimited amounts of the countries’ sovereign bonds.

“Confidence in the global financial system remains exceptionally fragile,” the IMF said in its report. “Bank lending has remained sluggish across advanced economies.” More risk aversion has also cut the flow of funds into emerging markets, it added.

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