IMF :Global slowdown worse than thought

The global economy is much weaker than believed just months ago, and growth will pick up only slightly next year, the International Monetary Fund said Tuesday. The IMF lowered its growth forecasts for the global economy to 4.0 percent for 2011 and 2012, saying activity had "weakened significantly," but warned of a return to recession if Western leaders fail to get their economies back on track. "The evidence points to continued, uneven growth," the IMF said in a twice-yearly outlook report. The global economy, which rebounded in 2010 following the 2008-2009 Great Recession, has been dragged down by problems in the advanced countries, particularly the United States and the eurozone, it said. And emerging market economies that have been the recovery's driving force, such as China and India, will not escape unscathed from the weakness in the advanced economies, the Washington-based lender said. The IMF's World Economic Outlook report said global growth will be half a percentage point lower than it estimated in June, and well below the 5.1 percent pace in 2010. "Anemic" consumption in advanced economies and spiking financial volatility over worries about US and eurozone public debt have put the brakes on growth. The slower recovery in advanced economies this year was "a development we largely failed to perceive as it was happening," acknowledged Olivier Blanchard, the chief economist of the 187-nation institution. A large increase in fiscal and financial uncertainty gathered steam in August, roiling financial markets as investors watched political gridlock in Washington over US debt and deficits and the spreading contagion of Greece's debt crisis in the eurozone. "Markets have clearly become more skeptical about the ability of many countries to stabilize their public debt," Blanchard said in a statement. "Strong policies are urgently needed to improve the outlook and reduce the risks," he said. The United States, the world's largest economy, suffered the most notable downgrade -- about a percentage point -- with gross domestic product growth estimated at 1.5 percent this year and 1.8 percent in 2012. For the 17-nation eurozone, GDP growth was projected to slow by about a half point, to 1.1 percent in 2012. Japan's economy is rebounding from the March earthquake and tsunami disaster, the IMF said, and is expected to contract 0.5 percent this year, less than previously estimated, before clocking in 2.3 percent growth in 2012. For the emerging market and developing economies, the IMF said that capacity constraints, policy tightening and slowing foreign demand would result in slightly slower GDP growth of 6.1 percent in 2012. China will continue to lead the world's growth but at a modestly slower pace -- 9.0 percent next year -- while India was projected at a 7.5 percent rate. Growth downgrades were nearly universal, from Russia, Latin America and Sub-Saharan Africa to the Middle East and North Africa. Rising oil prices, believed to be pushed up by the political unrest in the Arab world, also provided an unexpected shock to the global economy but appear to be unwinding, the IMF said. The forecasts assume a barrel will cost an average $100 in 2012, compared to $79.03 in 2010. The IMF warned that a negative feedback loop between low growth and fiscal and financial stability is at the heart of risks facing the world economy. Worries about sovereign debt have spread amid slowing growth, extending to the banks holding those government bonds, mainly in Europe. "Policy indecision has exacerbated uncertainty and added to financial strains, feeding back into the real economy," the report said. "WEO projections assume that policymakers keep their commitments and the financial turmoil does not run beyond their control, allowing confidence to return as conditions stabilize." If they fail to do that, "the major advanced economies could fall back into recession," the IMF said. "Vulnerable sovereigns are prone to a sudden loss of investor confidence in their debt sustainability if fundamentals deteriorate sharply." The IMF recommended a three-pronged approach to boost growth. Fiscal consolidation that is fast enough to inspire credibility but not so fast it will kill growth, as well as meaures to prop up domestic demand, such as continued low interest rates. The second leg is financial measures, including strengthening banks, while the final leg is rebalancing global trade flows. For example, the United States, should increase exports and China needs to increase imports. "Only with this global rebalancing can we hope for stronger growth in advanced economies and, by implication, for the rest of the world," Blanchard said.