IMF cuts world growth forecast for 2013
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IMF cuts world growth forecast for 2013

The IMF cut its world growth forecast for 2013 today as the eurozone recession continued to drag, but predicted growth overall would pick up in the second half of the year.

business Updated: Apr 16, 2013 22:18 IST

The IMF cut its world growth forecast for 2013 on Tuesday as the eurozone recession continued to drag, but predicted growth overall would pick up in the second half of the year.

In its newest assessment of the global economy, the International Monetary Fund said world output would expand by 3.3% in 2013, compared to the 3.5% it predicted in January.

That left the pace of the world economic expansion virtually flat from 2012's 3.2%, with slower-than-expected growth in the United States and prolonged stagnation in the euro area the key reasons behind the downgrade.

Despite some promising signs, though, the IMF expressed concerns over a global fragmentation between the dynamism of the emerging countries, the United States just puttering along in second gear, and the eurozone stagnating.

"We are in a better place but... we're not out of the woods," said Olivier Blanchard, IMF chief economist, at a news conference.

The global crisis lender said that short-term risks still loomed especially in the eurozone, where Cyprus's fresh bailout and Italy's weaknesses could still spark fresh setbacks.

"The slump in the eurozone is worrisome," said Blanchard.

But the IMF also saw growth slower in large emerging economies like Russia, China, Brazil and India, underscoring the global sense of economic weakness.

"Global prospects have improved again but the road to recovery in the advanced economies will remain bumpy," the IMF said in its World Economic Outlook report.

"In the medium term, the key risks relate to adjustment fatigue, insufficient institutional reform, and prolonged stagnation in the euro area as well as high fiscal deficits and debt in the United States and Japan.

"In this setting, policymakers cannot afford to relax their efforts."

With immediate crises out of the way, the Fund stuck close to its previous estimate for global growth in 2014, predicting a 4.0% expansion, "assuming that policymakers avoid setbacks and deliver on their commitments."

Generally prospects were better since last year after two of the largest short-term threats to the global recovery were defused: the threat of a breakup of the eurozone and a potentially sharp contraction in the United States driven by extreme budget cuts and tax hikes.

Even so, the two giant economies continue to drag. US growth was forecast at 1.9% this year, due to larger-than-expected government spending cuts, and the eurozone was expected to contract 0.3%.

Even in Europe's powerhouse Germany, growth is forecast at less than 1% in 2013.

Although markets are giving struggling eurozone governments better terms for financing, that improvement is not passing through to businesses and households, mainly because banks remain hobbled by bad debt and weak capital, the Fund said.

The immediate threat, though, remains "uncertainty about the fallout from events in Cyprus and politics in Italy as well as vulnerabilities in the periphery."

The IMF upped its growth forecast for long-stagnant Japan, to 1.6% from 1.2%, as the Bank of Japan launches an ambitious stimulus plan to reflate the economy.

But that also promised to elevate further Tokyo's massive debt load, which the IMF says is an important point of concern without a medium-term plan to reduce its debt.

Among emerging economies, the IMF lowered its 2013 forecast for China's growth by 0.1% point to 8.0% - still better than 2012's pace - and Brazil by 0.5% points to 3.0%.

On Monday, Beijing said growth in the first quarter ran a lower-than-expected pace of 7.7% fueling fears that a rebound in the world's number-two economy is faltering on weak overseas demand.

The IMF said that Asia and Sub-Saharan Africa remain supported by resilient domestic consumer demand, and should improve if growth in the eurozone, US and other advanced economies picks up.

But the Middle East-North Africa region is still struggling with political reforms, and inflation and foreign exchange market pressures are setting tough challenges in some Latin American countries.

The IMF said the "bumpy" progress of the advanced economies was making it difficult for developing countries themselves to get traction as well as to manage gushes of capital and upward pressure on currencies.

Although worldwide inflation was generally under control, it warned advanced-economy central banks stoking their markets with liquidity to remain on guard for a change in price expectations.

However, it said, growing complaints about competitive exchange rate devaluations "appear overblown."

"The US dollar and the euro appear moderately overvalued and the renminbi moderately undervalued. The evidence on valuation of the yen is mixed."

"The challenge for recipient countries is to accommodate the underlying trends while reducing the volatility of the flows when they threaten macro or financial stability."

First Published: Apr 16, 2013 22:13 IST