February 27, 2024

I.M.F. Slashes Growth Outlook for U.S. and Europe

The International Monetary Fund sharply downgraded its outlook for the United States economy through 2012 because of weak growth and concern that Europe won’t be able to solve its debt crisis, the organization said in its economic outlook Tuesday.

The fund said it expected the American economy to grow just 1.5 percent this year and 1.8 percent in 2012. That’s down from its June forecast of 2.5 percent in 2011 and 2.7 percent next year.

The International Monetary Fund also lowered its outlook for the 17 European Union countries that use the euro. It predicted 1.6 percent growth this year and 1.1 percent next year, down from its June projections of 2 percent and 1.7 percent, respectively.

The gloomier forecast for Europe was based on worries that Greece would default on its debt and destabilize the region.

“Fear of the unknown is high,” said Olivier Blanchard, the organization’s chief economist. “Strong policies are urgently needed to improve the outlook and reduce the risks.”

Over all, the International Monetary Fund predicted global growth of 4 percent for both years. Stronger growth in China, India, Brazil and other developing countries should offset weaker output in the United States and Europe.

American and European policy makers need to act more decisively to cut budget deficits, the report said, and European officials need to ensure that the region’s banks have enough capital to withstand the debt crisis.

The United States economy grew at an annual rate of just 0.7 percent in the first six months of the year. And the unemployment rate has stayed above 9 percent for all but two months since the recession officially ended two years ago.

Financial turmoil and slow growth are feeding on each other in both the United States and Europe, fund officials say. Europe’s debt crisis is causing banks to reduce lending and hold onto cash. Sharp stock market drops in the United States over the summer hurt consumer and business confidence and will likely reduce spending. That slows growth, which leads many investors to shift money out of stocks and into safer investments, like Treasury bonds. In Europe, slower growth will make it harder for stressed nations to get their debt under control.

President Obama’s proposal to cut taxes and spend more on infrastructure should provide much-needed short-term stimulus, the report said. But that initiative needs to be paired with a longer-term plan to reduce the deficit, the report said. The timing of the budget cuts is key, Mr. Blanchard said.

Budget cuts “cannot be too fast or it will kill growth,” Mr. Blanchard said in a statement. “It cannot be too slow or it will kill credibility.”

The 187- nation International Monetary Fund conducts economic analysis and lends money to countries in financial distress. It will hold its annual meetings with the World Bank later this week in Washington.

Article source: http://www.nytimes.com/2011/09/21/business/global/imf-slashes-growth-outlook-for-us-and-europe.html?partner=rss&emc=rss

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