IMF lowers predictions for economic growth rate

The IMF estimates the global economy growing at 3.5% this year, according to its latest World Economic Outlook.

It is a marginal downgrade on the 3.6% growth rate the IMF forecast in its April outlook.

However, it now forecasts 2013 growth at 3.9% — down from a previous estimate of 4.1%. Moreover, it sees risks firmly to the downside.

The IMF cites the continuing financial crisis in Europe, combined with sluggish growth in emerging markets, as the main factors behind its downbeat assessment.

“More worrisome than these revisions to the baseline forecast is the increase in downside risks,” said Olivier Blanchard, the IMF’s chief economist and director of its research department, which prepares the outlook.

Mr Blanchard said the IMF’s outlook is based on there being enough policy action in the eurozone to ensure that tensions in the periphery countries do not worsen in 2013; that the US government can resolve the major fiscal funding challenges towards the end of this year; and that major emerging markets can stimulate economic growth over the coming year.

The biggest threat to the global economy remains the eurozone crisis. The IMF welcomed the moves towards a banking union proposed at the last EU summit as it would be one of the most effective ways to break the link between sovereign debt and banks. It urged eurozone authorities to act with speed to implement policies.

The IMF notes the US faces a funding cliff once temporary tax cuts expire in November. There will be further risks to the global economy unless there is a resolution to this funding gap. The IMF also notes the slower growth environment in the major emerging markets including China and India.

The IMF also released the Global Financial Stability Report. Again, risks are to the downside as the stalled global recovery takes its toll on bank assets.

The IMF’s fiscal monitor update notes that fiscal readjustment is “proceeding generally as expected in advanced and emerging economies”.

It warns that a focus on nominal deficit targets could lead to excessive tightening if growth weakens in advanced economies. Countries that have the space to do so should consider other measures to boost public finances.

And in view of what is happening in Greece, it warns against adjustment fatigue in programme countries, including Ireland.