IMF cuts world growth outlooks, warns on US debt cliff

A worker pushes a mail cart through Statuary Hall at the Capitol in Washington, DC on Oct 7, 2013. (AFP/Mark Wilson)

WASHINGTON: The International Monetary Fund on Tuesday lowered its growth forecast for the global economy and warned the outlook could get bleaker if the US political standoff over finances drags on.

The IMF shaved its 2013 growth forecast by 0.3 percentage point to 2.9 per cent and its 2014 forecast by 0.2 point to 3.6 per cent.

Four years after the Great Recession ended, "global growth remains in low gear," the IMF said in its World Economic Outlook.

The report sets the basis for discussions at the annual IMF/World Bank meetings later this week, and marks revisions from the Fund's July forecasts.

Advanced economies, in particular the United States, are showing signs of pick-up, while emerging-market economies, although still accounting for most global growth, are losing more momentum than previously thought, the IMF said.

"Global growth is still weak, its underlying dynamics are changing, and the risks to the forecast remain to the downside," the global lender said.

Two risks were a particular worry: the US Federal Reserve's plan to exit its exceptionally easy-money policy in place since the 2008-2009 recession, and China's slowing growth.

The IMF said that financial markets were growing convinced that loose US monetary policy was reaching a "turning point" after Fed officials started talking in May about tapering their program of $85 billion a month on asset purchases, known as quantitative easing.

Though the Fed has yet to begin to taper, the mere talk of it led to an unexpectedly large increase in long-term yields in the United States and many other economies, slowing capital inflows to emerging-market economies, it said.

The IMF said that China, the world's second-largest economy, appears likely to grow more slowly over the medium term than in the recent past, a prospect especially affecting the commodity exporters among the emerging and developing economies.

Overall, the IMF left unchanged its gross domestic product (GDP) growth forecasts for the advanced economies, at 1.2 per cent in 2013 and 2.0 per cent in 2014.

US budget politics pose global threat

In the US, growth in the world's largest economy would tick along at 1.6 per cent in 2013, picking up to a 2.6 per cent pace next year, slightly less activity than the July estimates.

"At the time of writing, a political standoff in the United States has led to a shutdown of its federal government. The projections assume that the shutdown is short, discretionary public spending is approved and executed as assumed in the forecast, and the debt ceiling -- which may be reached by mid-October -- is raised promptly," the IMF said.

"While the damage to the US economy from a short shutdown is likely to be limited, a longer shutdown could be quite harmful. And, even more importantly, a failure to promptly raise the debt ceiling, leading to a US selective default, could seriously damage the global economy."

Olivier Blanchard, the IMF's chief economist, underlined the Fund's concerns about the US debt ceiling impasse at a news conference at the Fund's headquarters in Washington.

"Failure to lift the debt ceiling... will lead to an extreme fiscal consolidation and almost surely derail the US recovery," Blanchard said, predicting a recession "or even worse".

"The effect of any failure to repay the debt will be felt right away, leading to potential major disruption in financial markets both in the US and abroad," he said, adding that a failure was "a low-probability risk."

The IMF said the eurozone's recession this year would not be quite so deep, a 0.4 per cent contraction, compared to the 0.5 per cent contraction in its July forecast. The European single-currency bloc is expected to return to growth next year, albeit at a tepid 1.0 per cent annual rate.

Japan, battling years of deflation and stagnation, is showing an "impressive pickup" in growth thanks to the Bank of Japan's easing policies and the government's stimulus, the IMF said.

In minor revisions, the Fund predicted Japan will grow 2.0 per cent in 2013, but slow to 1.2 per cent in 2014 under pressure from tightening fiscal policy.

Growth forecasts for China were lowered a few tenths of a point for both years, to 7.6 per cent in 2013 and 7.3 per cent in 2014.

The largest reductions in 2013 growth estimates were for India, to 3.8 per cent, and Mexico, to 1.2 per cent.

The outlook for Brazil, the largest South American economy, was unchanged at a 2.5 per cent rate in 2013, but the 2014 number was lowered by 0.7 point to 2.5 per cent.

Slowdowns in China, India and Brazil have been largely responsible for the downgrade on growth in emerging market and developing economies. The IMF cut about half a point off its July update for that group, to 4.5 per cent in 2013 and 5.1 per cent in 2014.

"The focus at this time is on emerging-market economies -- specifically, on the combination of slower growth and tighter financial conditions triggered by US monetary policy," Blanchard wrote in the foreward of the report.