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IMF Says the Economy Hit a 'Dangerous New Phase'

Outlook Slashes Growth Expectations for the U.S.

Sep 20, 2011 1:18 PM   By Jeff Miller
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RAPAPORT... The International Monetary Fund (IMF) lowered its expectations for economic growth due to "multiple shocks" and insufficient rebalancing efforts by the major economies.  The  global economic recovery is slowing, with world growth now projected at 4 percent in both 2011 and 2012, down from an earlier prediction of 4.3 percent and 4.5 percent respectively. But the IMF said that even a 4 percent rate of growth counts on "a lot going well."

''The global economy is in a dangerous new phase,'' according to the IMF's statement today. ''Global activity has weakened and become more uneven, confidence has fallen sharply recently and downside risks are growing.''

IMF's chief economist, Olivier Blanchard, warned that strong policies were urgently needed to improve the outlook and to reduce the risks. ''Only if governments move decisively on fiscal policy, financial repairs, and external rebalancing, can we hope for stronger and more robust recovery,'' he said.

In the group's latest predictions, economic growth was lowered by 1 percentage point for the U.S. to a 1.6 percent rate of growth in 2011 and by nearly as much for 2012 to 1.9 percent. The Euro-zone was lowered 0.4 percentage points for 2011 to 1.5 percent and by 0.6 percentage points in 2012 to a 1.1 percent rate of growth. The IMF lowered growth rates slightly for China and India, as well; however, both economies should experience high-single-digit rates of growth in 2011 and 2012.

The updated projections depend upon  a number of assumptions, including that European policymakers will be able to contain the euro crisis to the so-called periphery countries, that U.S. policymakers strike a judicious balance between support for the economy and medium-term fiscal consolidation, and that ups and downs in global financial markets don't get worse. If those assumptions are not met, global growth will be much lower, according to the IMF.

The global body surmised that there must be internal rebalancing from government stimulus to private demand in the major economies. ''Despite considerable progress on this front in many countries, the major advanced economies lag behind. Reasons vary by country but tight bank lending, repercussions from the housing boom, and high household indebtedness are all putting stronger brakes on the recovery than expected,'' the group concluded.

Fiscal consolidation cannot be so fast that it kills growth, nor should it be so slow that it kills recovery, added Blanchard. ''The key is credible medium-term consolidation. Other measures to prop up domestic demand, including continued low interest rates, increased bank lending, and housing loan resolution programs, are also essential, he stressed,'' he said.

Secondly, countries with large external surpluses must achieve more domestically driven growth, while those with large deficits, most notably the U.S., must do the opposite. And this is not happening. Now the forecast is for an increase rather than a decrease in imbalances.

The IMF cited three main risks to the global economy moving forward. For the Euro-zone,  banks must be made stronger, not only to avoid deleveraging and maintain growth, but also  to reduce the risks of vicious feedback loops between low growth, weak sovereigns, and weak banks. This requires additional capital buffers, from either private or public sources.

In the U.S.,  top priorities to reduce risk  include devising a medium-term fiscal consolidation plan to put public debt on a sustainable path and to implement policies to sustain the recovery, including by easing the adjustment in the housing and labor markets. ''The new American Jobs Act would provide needed short-term support to the economy, but it must be flanked with a strong medium-term fiscal plan that raises revenues and contains the growth of entitlement spending,'' the IMF's report noted. 

Thirdly, Japan's  government should pursue more ambitious measures to deal with the very high level of public debt while attending to the immediate need for reconstruction and development in the areas hit by the earthquake and tsunami.


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Tags: China, Economy, euro-zone, global, growth, India, Jeff Miller, United States
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