Thursday, October 7, 2010

Debt Crisis Dims IMF Outlook

Debt Crisis Dims IMF Outlook

WASHINGTON—Global growth will slow more than expected in 2011 as European public-debt problems continue to undermine the recovery in industrialized nations, the International Monetary Fund said Wednesday.

Emerging markets such as China and India are forecast to remain growth champions, but advanced economies are cutting budgets amid the sovereign-debt crisis.

All told, the IMF predicted the world economy will expand 4.8% in 2010 and 4.2% in 2011.

Expansion prospects for the U.S. took the IMF's largest downgrade, falling to 2.3% from an earlier estimate of 2.9%. China's growth is still expected to fall slightly in 2011, to a brisk 9.6%, from 10.5% this year.

Many of the projections for the current year were revised downward, including the forecasts for Russia and the U.S.

The IMF warned, however, that a hasty withdrawal of stimulus in countries with sound fiscal positions as well as strong, potentially destabilizing capital inflows were key risks to Asian growth.

The risks for economies to backslide are still high amid the fragile economic recovery, the IMF said. "The financial sector is still vulnerable to shocks and growth appears to be slowing as policy stimulus wanes," predominantly in advanced economies, the IMF said.

Renewed turbulence from the sovereign-debt crisis has the potential of "inflicting major damage on the recovery," a risk increased by the roughly $4 trillion in debt that has to be refinanced over the next two years.

"Simultaneously addressing both budgetary and competitiveness problems in a deteriorating external environment is likely to take a heavy toll on growth," the IMF said.

While specific plans to cut budgets to reduce public debt are urgently needed, if growth slows significantly more than expected, the IMF recommended that some countries with fiscal room to spare should put off belt-tightening plans.

The IMF said medium-term plans for "growth friendly" fiscal consolidation promised by rich Group of 20 nations are still missing. "This task is now more urgent than it was six months ago," especially given the possibility that some countries may need to postpone their 2011 plans to cut budgets, the Fund said.

Weak real-estate markets, a jittery financial sector and slow inventory rebuilding are slowing the transition from government-stimulated expansion to a privately led recovery.

The IMF said a sustained recovery requires a careful rebalancing act, both domestically and globally. Rich nations need to strengthen private demand, which would buy room for budget cuts.

Countries with trade deficits, such as the U.S., need to boost their net exports, while countries with trade surpluses, particularly in Asia, must cut their net exports.

In a nod to the Chinese, the IMF said rebalancing can be done only with greater exchange-rate flexibility for undervalued currencies.

Rebalancing and foreign-exchange issues have been at the fore of IMF and ministerial talks in Washington this week, as concerns over the yuan and fiscal tightening have risen. "Unless financial and structural policies are significantly strengthened, potential output in advanced economies is likely to remain appreciably below precrisis levels," the IMF said.

Although domestic demand in emerging economies has become more robust, the IMF expects global demand rebalancing to stall as domestic consumption won't be strong enough to offset weaker demand from advanced economies.

Adding to recovery headwinds, the IMF warned that financial-sector overhauls need to be accelerated to restore healthy credit levels. "The financial sector remains the Achilles' heel of recovery prospects for private demand," the IMF said, calling restructuring efforts "painfully slow."

In many countries, the recovery is shaping into a jobless one: unemployment in advanced economies receded only modestly from peak rates, with an estimated 210 million people across the globe without work.
—David Roman contributed to this article.

Write to Ian Talley at

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