July 12, 2013

IMF Issues Tepid Forecast, Hints It Does Not Like U.S. Tapering

Global lender cuts April guidance, says risk dominates world economy

The International Monetary Fund has lowered its forecast for world economic growth in a generally glum report which states that downside risks dominate growth prospects.

And like a doctor recommending diet and exercise to a patient more accustomed to binge snacking and chronic inactivity, the Washington-based institution also put in a muted good word for structural reform in its quarterly World Economic Outlook, released this week.

The IMF forecasts global growth of 3.1% in 2013, a downward revision from its April forecast of 3.3%, and its 3.8% projection for 2014 is also lower than its April 4% forecast.

The 188-nation organization says slow growth in the U.S. and deceleration in emerging markets—the world’s former economic engines — and a deeper-than-expected recession in the euro area leading to “depressed confidence” — are the primary causes of the world’s underperformance.

The U.S. economy this year is projected to grow at a 1.7% rate, lower than last year’s 2.2% rate, but fueled by rising household wealth resulting from the U.S. housing recovery, the IMF forecasts 2.7% growth next year.

Japan’s easy-money-fueled economy is expected to grow at a 2% rate this year, falling to 1.2% next year.

The euro area is contracting by more than half a percent this year, which growth projected at just under 1% next year.

Emerging-market and developing economies are seen as moderating the more rapid pace of growth that helped balance the world economy in the midst of the financial crisis.

The IMF forecasts 5% growth in 2013 and 5.5% next year for the broad sector, but lowering its April forecast for growth in China—down a quarter and half percentage points respectively from the 7.75% it had projected for 2013 to 2014 in its previous report. Forecasts for all the BRICS countries were also revised downward by one to three quarters of a percentage point.

Altogether, projections for global growth for 2013 to 2014 have come down a quarter of a percent from the IMF’s April forecast. The report says that new risks have been added to old ones, and made note of “temporary uncertainty about the exit from monetary policy stimulus in the United States.”

The report implicitly criticized the Federal Reserve’s new tapering policy — i.e., cessation of bond buying — saying that “with low inflation and sizable economic slack, monetary policy stimulus should continue until the recovery is well established.”

But then in an on-the-one-hand, on-the-other-hand style, the IMF expressed support for monetary easing as a “first line of defense against downside risks,” while acknowledging “potential legacy problems from a prolonged period of rapid credit growth.”

In an overall economic prescription, the world economic institution said “key advanced economies should pursue a policy mix that supports near-term growth, anchored by credible plans for medium-term public debt sustainability.”

More specifically, it called on China to increase consumption and Germany investment, while urging deficit countries to take measures that increase competitiveness.

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