The fund cautioned, however, that growth was hardly expected to snap back to precrisis levels in the coming years. Over all, the fund expects global growth of 3.5 percent in 2013 and 4.1 percent in 2014, up from 3.2 percent in 2012. In the years just before the global downturn, annual economic growth ranged from 4.5 to 5.5 percent.
“If crisis risks do not materialize and financial conditions continue to improve, global growth could be stronger than projected,” the Washington-based fund said in its economic report. “However, downside risks remain significant, including renewed setbacks in the euro area and risks of excessive near-term fiscal consolidation in the United States. Policy action must urgently address these risks.”
The fund issued a routine update to the projections it makes in its twice-yearly World Economic Outlook report. This time, it whittled down many of the forecasts for 2013 that it had made in October, knocking 0.1 percentage point from its United States growth forecast, 0.3 percentage point from the euro area and 0.4 percentage point from the newly industrialized Asian economies, like Singapore and South Korea.
Still, the International Monetary Fund noted that financial stresses and the risk of a major policy shock in Europe and the United States have decreased. “Optimism is in the air,” said Olivier Blanchard, the fund’s chief economist, at a news conference. “Some cautious optimism may indeed be justified,” he added. “We may have avoided the cliffs, but we still face high mountains.”
The fund said it downgraded its estimate of European growth from October despite “progress in national adjustment and a strengthened European Union-wide policy response to the euro area crisis.” It said that there might be “delays” as lower sovereign bond yields and reduced financial stress eventually translated into improved private sector borrowing conditions. It added that uncertainty about the ultimate resolution of the long-simmering European debt crisis remained high.
Mr. Blanchard said that policy challenges “clearly” remained highest in certain European countries struggling with large debt burdens and slow-growing economies. He said business competitiveness and exports had improved recently, but high interest rates, pressure for budget cuts and uncertainty continued to depress growth.
Slow growth in advanced economies, including the United States, Germany and Japan, will continue to weigh on growth in emerging economies, the fund said.
Mr. Blanchard noted that financial markets had become considerably more sanguine over the last year. The European Central Bank started a major new bond-buying program and the United States avoided the worst of the so-called fiscal cliff package of tax increases and budget cuts. He said that could be a sign that the financial markets were experiencing some kind of “bubble” but also said that investors could be “seeing things which are truly good.” Ultimately, with less financial stress, the real economy should pick up, thus explaining the market optimism, he said.
In terms of policy advice, Mr. Blanchard said that his “main message” would be that “financial market optimism should not lead to policy complacency.”
For Washington, the “priority is to avoid excessive fiscal consolidation in the short term, promptly raise the debt ceiling and agree on a credible medium-term consolidation plan,” the fund’s economists said. Christine Lagarde, the fund’s managing director, and other officials have repeatedly warned politicians in Washington not to embark on too stringent an austerity program, for the good of the world economy as well as the United States.
At the news conference, Thomas Helbling of the fund’s research division said that the United States faced a “long-term” fiscal problem, with much of the policy challenge resting in bringing down health care spending over time. He said that the challenge seemed “doable,” and stressed that other countries faced far more wrenching adjustments.
This month, the fund’s sister institution, the World Bank, released a rosier economic analysis. It foresees global growth of just 2.4 percent in 2013. But it said that emerging economies could worry less about downside risks from advanced economies and start focusing on domestic economic issues, like labor market or regulatory reforms.
Article source: http://www.nytimes.com/2013/01/24/business/economy/imf-forecast-global-economic-growth-modest-at-best.html?partner=rss&emc=rss
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