IMF issues dire warning on world economy

In August S&P cut the long-term US credit rating by one notch to AA+ with a negative outlook [Reuters]

The world economy has entered a “dangerous new phase” of sharply lower growth, the International Monetary Fund (IMF) has warned.

Olivier Blanchard, the IMF’s chief economist, said late on Tuesday that the global economy’s “recovery has weakened considerably”, adding that “strong policies are needed to improve the outlook and reduce the risks”.

The IMF expects the US economy to grow just 1.5 per cent this year and 1.8 per cent in 2012, down from its June forecast of 2.5 per cent in 2011 and 2.7 per cent next year.

As a result, the international lending organisation has sharply downgraded its economic outlook for the US and Europe through the end of next year.

To achieve even that still-low level of growth, the US economy would need to expand at a much faster rate in the second half of the year than its 0.7 per cent annual pace in the first six months.

Last month Standard & Poor cut the long-term US credit rating by one notch to AA+ with a negative outlook, amid fears about budget deficits.

Eurozone outlook lowered

The IMF has also lowered its outlook for the 17 countries that use the euro. It predicts 1.6 per cent growth this year and 1.1 per cent next year, down from its June projections of 2 per cent and 1.7 per cent, respectively.

The gloomier forecast for Europe is based on worries that euro nations will not be able to contain their debt crisis and keep it from destabilising the region.

The IMF says the two big issues are the Eurozone and the anaemic US recovery [GALLO/GETTY]

“Markets have clearly become more sceptical about the ability of many countries to stabilise their public debt,” Blanchard said. “Fear of the unknown is high.”

Overall, the IMF predicts global growth of 4 per cent for both years. Stronger growth in China, India, Brazil and other developing countries should offset weaker output in the United States and Europe.

Financial turmoil and slow growth are feeding on each other in both the United States and Europe, IMF 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 have 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, such as Treasury bonds.

In Europe, slower growth will make it harder for stressed nations to get their debt under control.

US and European policymakers must act more decisively to cut budget deficits, the IMF said.

European banks need to boost their capital buffers more quickly and beyond new minimum levels set to come into force in 2019, the IMF said.