The International Monetary Fund says in its latest forecast that the world economy has declined further and will recover more slowly over the next year.
Advanced economies are risking recession and, according to the international lending organization, the problems are spreading to more dynamic emerging economies such as China.
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The IMF predicts that the world economy will grow 3.3 percent this year, which is down from the 3.5 percent growth it estimated in July. Its expectation for growth in 2013 is 3.6 percent, down from 3.9 percent three months ago and 4.1 percent in April.
That darker scenario is further underpinned by the assumptions that Europe will continue to ease monetary policy and that the U.S. will avoid a crushing blow to growth by fending off a so-called “fiscal cliff”. The latter could be triggered by a failure to reach a compromise on its budget law and tax cuts.
The IMF noted that conditions could worsen if the United States doesn’t deal with its budget crisis soon.
According to the fund, downside risks have increased. It said its expectations are based on decisive policy action in the euro area and the United States, and it is very difficult to estimate if this move will actually be made.
The U.S. was urged by the IMF to increase the ceiling on the level of debt the government can issue, which is now restricted by law. In August 2011, there was an argument between the Obama administration and Congress over raising the limit. This issue wasn’t resolved until the U.S. almost defaulted on its debt.
The IMF warned that global attempts to ease credit and raise the amount of money available for lending are helping, but seem to be resulting in less and less returns. The same applies to fiscal stimulus policies.
The fund revealed that since uncertainty is high, confidence is low, and financial sectors are weak, the considerable fiscal achievements have been accompanied by declining growth or recessions.
It also notes that governments have to do more to diminish the burden of household debt that is affecting negatively spending power and thus lowering demand.
Households and small companies barely obtain bank loans, while large corporations pay unprecedently low rates for credit.
Boosting domestic demand is even more important now, considering declining trade trends. The IMF predicts that world trade growth will plummet to 3.2 percent this year from 5.8 percent last year and 12.6 percent in 2010.
The IMF’s chief economist, Olivier Blanchard, pointed out in a statement that declining growth and uncertainty in advanced economies are affecting emerging market and developing economies through both trade and financial channels.
However, on Tuesday he told reporters a more upside scenario was possible if the right measures are taken, including fixing banks in European countries and diminishing the uncertainty about U.S. policies.
He announced at the opening of the IMF meeting in Tokyo that there are better chances for an optimistic scenario than before.
He pointed out some positive signs in the U.S. economy such as a shift in the housing market. The IMF also perceives the stagnation in China as part of a change from the past double-digit growth to a rate that is “sustainable”. Moreover, the stagnation in developed nations had affected negatively exports, which, according to other IMF officials, is the key factor behind the slowdown in China.
The IMF upgraded the U.S. growth forecast slightly, to 2.2 percent this year from 2 percent in July. However, for 2013, it predicts U.S. growth to go down to 2.1 percent from 2.3 percent.
Among the 17 nations that use the euro, slow growth in the major “core economies,” including Germany and France, will be triggered by shrinking in the smaller economies. According to the IMF, this could cause real gross domestic product to drop by about 0.4 percent in 2012.
The IMF also said that growth in the euro area will stay flat in the first half of 2013 and rise to about 1 percent in the second half of the year.
The report was revealed just before the World Bank-IMF annual meeting, which is being held in Tokyo this week. The meeting of some 10,000 bankers, executives and officials will likely again draw the attention to Japan’s inability to escape its own economic crisis two decades after its own financial decline in the early 1990s.
The IMF predicts growth in Japan to reach 2.2 percent this year but to decline further, as reconstruction from the March 2011 disasters is slow, to 1.2 percent in 2013.
The fund announced that Japan, whose population is shrinking and aging faster than elsewhere, is facing problems of high debt and slowdown.
According to the IMF, the bright spots are developing economies that were less affected by the global financial recession. Increasing employment and rising demand there will help boost growth.
The economy of China will likely grow 7.8 percent this year, down from July’s 8 percent forecast. Nevertheless, improvement in construction projects is expected to boost growth late in the year. India’s economy will grow 4.9 percent, compared to 6.1 percent, and Brazil’s growth will be only 1.5 percent, down from 2.5 percent.
The advice of the IMF is for policymakers to decide on stronger medium-term fiscal and structural reforms to bolster confidence in the growth potential of the advanced economies.
This is the only way to restore investor confidence in markets and public debt.
The fund said that if governments fail to devise how they intend to implement the necessary adjustment over the medium term, a cloud of uncertainty will continue to hang over the global economy.
