Global recovery under threat, says IMF

19 Mar 12
The International Monetary Fund has slashed its forecast for global growth in 2012 and warned of increased risks to financial stability.

Nick Mann | 24 January 2012

The International Monetary Fund has slashed its forecast for global growth in 2012 and warned of increased risks to financial stability.

In an update to its World Economic Outlook  published today the fund said the global recovery was threatened by ‘intensifying strains’ in the euro area and ‘fragilities’ elsewhere.

As a result, it revised the 4% growth forecast for 2012 it made it September 2011 down to 3.25%. The fund said this was largely because it now expects the eurozone to enter a ‘mild recession’ this year.

The eurozone economy will now shrink by 0.5% in 2012, it said, compared to its September forecast for 1.1% growth.  This change was attributed to the rise in sovereign yields, the effects of bank deleveraging on the ‘real economy’ and the impact of additional fiscal consolidation.

Growth in emerging and developing economies is also expected to slow as a result of the combined effect of the worsening global economy and weakening internal demand.

To address the issue, the IMF said: ‘The most immediate policy challenge is to restore confidence and put an end to the crisis in the euro area by supporting growth, while sustaining adjustment, containing deleveraging, and providing more liquidity and monetary accommodation.’

In an accompanying update to its Fiscal Monitor, the IMF backed countries’ deficit reduction programmes which it said were necessary for ‘medium term debt sustainability’.

However, it added they should ‘ideally occur at a pace that supports adequate growth in output and employment’.

Governments were warned against responding to unexpected downturns in growth by introducing further fiscal tightening policies and instead let ‘automatic stabilisers’ take effect.

It noted that this was happening in the UK, where adjustment policies were being made more ‘growth friendly’. Despite this, the UK’s budget deficit was still expected to fall ‘markedly’ in 2012, it said.

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