IMF cuts global growth forecast
The agency expects economic expansion of 2.9% globally and 1.6% in U.S. this year.
The agency expects economic expansion of 2.9% globally and 1.6% in the United States this year.
WASHINGTON — The International Monetary Fund has ratcheted down growth prospects for the United States and the rest of the world — and that’s before taking into consideration the effects of the federal government shutdown or the looming threat of breaching the debt ceiling.
“Global growth is in low gear, the drivers of activity are changing, and downside risks persist,” the IMF said in its latest world outlook, released Tuesday ahead of the annual meetings of the IMF and World Bank this week in Washington.
The fund now sees the global economy expanding at a rate of 2.9% this year. That would be the lowest increase in four years and down from its July forecast of 3.2%.
Economic growth should pick up next year to 3.6%, the IMF said, but that figure also was trimmed from 3.8% in the July projection.
In preparing the new forecast, IMF officials said they had assumed that any U.S. government shutdown would be brief and that lawmakers would raise the debt ceiling in time. But with the partial shutdown now in its second week and with no quick settlement in sight on the more ominous debt-limit threat, many analysts and investors are starting to get nervous that the U.S. is moving dangerously close to the edge.
The Treasury Department has said the government faces the risk of default Oct. 17, when it will have to depend on cash on hand and incoming revenue to pay its bills.
“Failure to lift the debt ceiling would be a major event,” said Olivier Blanchard, the IMF’s economic research director, echoing concerns voiced by many experts around the world. It would almost certainly derail the U.S. recovery and spill over to the rest of the world, he said at a briefing Tuesday.
“If there was a problem lifting the debt ceiling,” he said, “it could well be what is now a recovery would turn into a recession — or even worse.”
Concerns about the debt ceiling, which could lead to a first-time default for the U.S., are likely to overshadow the annual meetings of the IMF and World Bank.
Even without the threat of a “fiscal accident” in the U.S., as Blanchard put it, the U.S. economy is feeling the weight of federal spending cuts under the sequester that took effect this year. The IMF revised down just a notch the U.S. growth forecast for this year, to a sluggish 1.6% rate, from 2.8% in 2012. Growth next year, however, should accelerate to 2.6%, though that too was lowered from the July estimate of 2.8%.
The main factor behind the weaker world outlook is what is happening in developing or so-called emergingmarket economies. Growth has slowed sharply this year, particularly in India, Mexico and Russia, and it has also softened somewhat in China, the world’s second-largest economy behind the United States.
The slowdown in emerging economies reflects an overall shift in the balance of growth in the world. After the deep recession, advanced economies, especially Europe, underwent a long downturn while emerging countries expanded at a rapid pace, partly because of large capital flows into those faster-growing economies with the availability of cheap money.
But more recently, Europe has shown signs of recovering from its debt crisis, Japan is making progress in its fight to break free from deflation and stagnation, and the U.S., for all of its fiscal and political problems, has trudged along while reducing private debts and improving the nation’s housing market and manufacturing.
Emerging-market economies, on the other hand, have seen their growth hampered by lower commodity prices, tighter financial conditions as investors have shifted funds to advanced nations, as well as a variety of structural economic problems at home, including undeveloped financial markets, barriers to investment and an over-dependence on exports and real estate.
“The world economy has entered yet another transition,” Blanchard said of the pattern of growth in developing and advanced nations.
This could lead to increased tensions, he said, particularly with the reversal of capital flows from emerging economies as central banks, notably the Federal Reserve, contemplate the beginning of a withdrawal of monetary stimulus.
Blanchard said it was time for central banks to be planning for such exit measures, but he noted that it was “not time yet to implement these policies.”