IMF cuts its forecast for global economy in 2013

Posted Online: April 16, 2013, 6:22 pm
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WASHINGTON (AP) — The International Monetary Fund has lowered its outlook for the world economy this year, predicting that government spending cuts will slow U.S. growth and keep the euro currency alliance in recession.

The global lending organization cut its forecast for global growth to 3.3 percent this year, down from its forecast in January of 3.5 percent. It didn't alter its prediction of 4 percent global growth in 2014.

The IMF expects the U.S. economy to expand 1.9 percent this year. That's below its January estimate of 2.1 percent and last year's U.S. growth of 2.2 percent. Still, the IMF says the U.S. economy is improving and should expand 3 percent in 2014. U.S. job growth has accelerated, the housing market is recovering and banks are more willing to lend.

The IMF predicts that the 17-country eurozone will shrink 0.3 percent in 2013 and grow only 1.1 percent in 2014.

The fund issued its latest World Economic Outlook on Tuesday in advance of the spring meetings of the IMF and World Bank in Washington later this week. Finance ministers from the G-20, a group of developed and large developing countries, will also meet.

On Monday, renewed worries about the global economy contributed to a plunge in the stock market. The Dow Jones industrial average sank 265 points, the biggest one-day decline since Nov. 7. Monday's drop was triggered partly by a report of slower growth in China, the world's second-largest economy after the United States.

Christine Lagarde, the IMF's managing director, said in a speech last week that the agenda for the meetings will include how to accelerate growth, create jobs and reform banking regulations.

The impact of government spending cuts and tax increases in the U.S. and other countries will also likely be a topic of this week's talks in Washington beginning Thursday. During a visit to Berlin last week, U.S. Treasury Secretary Jack Lew urged European officials to focus on policies that would encourage economic growth, rather than simply cutting deficits.

Developing countries may raise concerns at the G-20 about efforts by the U.S. Federal Reserve and Japan's central bank to stimulate their economies by buying more government bonds and other assets. Those moves can lower the value of the dollar and yen, which can make U.S. and Japanese exports cheaper overseas. That prospect has raised fears that other countries will take similar steps.

The IMF said worries about so-called "currency wars" are "overblown." The world's major currencies aren't excessively undervalued or overvalued, the IMF said in its report.

The developing nations are expected to show the strongest growth over the next two years, according to the IMF forecasts. China is forecast to expand 8 percent this year and 8.2 percent in 2014 to lead all nations. In its previous forecast, the IMF had predicted 8.1 percent Chinese growth this year and 8.5 percent in 2014.

India is projected to expand 5.7 percent this year and 6.2 percent in 2014. Three months ago, the IMF had forecast 5.9 percent growth in India this year and 6.3 percent next year.

The IMF forecasts were issued before China reported Monday that its growth slowed to 7.7 percent in the first quarter compared with the same period a year earlier. That was down from 7.9 percent in the previous quarter.

The growth in the developing world should offset another sluggish year in Europe. The 17-member eurozone, which shrank 0.6 percent in 2012, is expected to continue struggling as governments take steps to reduce their deficits and weak banks reduce lending.

The U.S. economy is projected to grow only modestly. Higher taxes and spending cuts will reduce growth by about 1.75 percentage points, according to Olivier Blanchard, the IMF's chief economist. Given that drag, the IMF's 1.9 percent growth forecast for 2013 is better than it looks, he added.

"Underlying private demand is actually strong," he said.

The IMF's forecast assumes $85 billion in across-the-board spending cuts will be replaced by Sept. 30, the end of the budget year. If they aren't, growth could be 0.2 percentage points lower, the IMF said.

The IMF criticized the United States for implementing steep spending cuts without a broader plan for longer-term reductions in deficits.

U.S. budget cutting "is too aggressive in the short term and too timid in the medium term. This adds to uncertainty and casts a shadow on the recovery," Lagarde said last week.

The fund sharply boosted its outlook for Japan, projecting 1.6 percent growth this year and 1.4 percent next year. That is 0.4 percentage point and 0.7 percentage point higher, respectively, than in January.


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