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IMF cuts global economic growth forecast

Global lending agency cites slower growth in China, India and other developing nations as main reason for downgrade.

Last Modified: 08 Oct 2013 19:46
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The IMF's forecasts assume the US partial government shutdown would last only a short period [AP]

The International Monetary Fund has cut its global economic growth forecasts and warned that the US would harm the world economy if it fails to raise its borrowing limit.

The international lending agency said on Tuesday that the global economy will grow 2.9 percent this year and 3.6 percent next year. Both are 0.2 percentage point lower than the group's July forecasts.

It cited the slower growth in China, India, Brazil and other developing countries as the main reason for the downgrade.

But the IMF also lowered its outlook for the US economic growth this year to 1.6 percent and next year to 2.6 percent. Those are 0.1 and 0.2 percentage points lower than in July, respectively.

The fund's forecasts assume the US partial government shutdown would last only a short period. But it warned that failure to raise the US government's borrowing limit later this month could lead to a default on US debt which would push up interest rates, disrupt global financial markets and possibly push the US economy back into recession.

"Failure to lift the debt ceiling would be a major event," said Olivier Blanchard, the IMF's chief economist.

US Treasury officials say the government would quickly run out of cash and could default on its obligations if Congress doesn't approve an increase in the borrowing limit by October 17. US Treasury bonds are a key part of the international financial system and a default would have global repercussions.

The IMF called on the Federal Reserve to clearly communicate its plans as it moves toward scaling back the bond purchases. But at the same time, it said the Reserve should continue its efforts to stimulate the economy.

"It is time to make plans to exit (bond purchases) and zero interest rates, though it is not yet time to implement those plans," Blanchard said.

Expansion in 2014

Europe's economy is also benefiting as government spending cuts and tax increases ease. The IMF forecasts the 17 nations that use the euro currency will expand 1 percent next year, after shrinking 0.4 percent this year. Those estimates are mostly unchanged from July.

Many developing countries, particularly India, have been hurt by expectations that the Federal Reserve will soon slow its $85-bn-a-month in bond purchases causing investors to pull money from India, Brazil and other emerging markets as yields on US assets picked up.

The fund slashed its forecast for India's growth by 1.8 percentage points to 3.8 percent this year and 1.1 percentage points to 5.1 percent in 2014. It projects that Brazil's economy will expand 2.5 percent this year, the same forecast as July.

But it no longer expects growth to accelerate in 2014. It now expects 2.5 percent growth next year, or 0.7 percentage point lower than its previous forecast.

India's central bank has raised interest rates in an effort to stem the flow of money leaving the country, a move that has also slowed growth.

Brazil's economy has been hampered by poor infrastructure and high inflation. That has forced its central bank to also raise interest rates.

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