The International Monetary Fund cut its global growth forecasts and now projects a second year of contraction in the euro region as progress in battling Europe's debt crisis fails to produce an economic recovery.
The world economy will expand 3.5 per cent this year, less than the 3.6 per cent forecast in October, the Washington-based IMF said today in an update of its World Economic Outlook report.
It expects the euro zone to shrink 0.2 per cent in 2013, instead of growing 0.2 per cent as forecast in October, as Spain leads the contraction and Germany slows.
"Is Europe on the mend? I think the answer is yes and no," IMF chief economist Olivier Blanchard said in a video released with the report. "Something has to happen to start growth."
While measures to stem the debt turmoil last year helped boost financial markets around the world and decrease sovereign bond yields from Spain to Greece, European officials now still face a recession and unemployment at a record 11.8 per cent.
The IMF warned that the region still poses a "large" risk to the rest of the world if efforts under way to strengthen its economies and work on a banking union slip.
The forecast for a second year of economic contraction reflects "delays in the transmission of lower sovereign spreads and improved bank liquidity to private sector borrowing conditions," as uncertainty remains over ending the trouble that has engulfed members such as Ireland and Cyprus, according to the report.
The fund expects the region's outlook to improve, forecasting a return to 1 per cent growth in 2014. It sees the world economy expanding 4.1 per cent next year, 0.1 per cent less than in October.
In the US, "underlying economic conditions remain on track," the IMF said as it cut its forecast for the world's largest economy to 2 per cent from 2.1 per cent in 2013 and raised it 0.1 percentage points to 3 per cent next year.
The priority is for Congress to avoid too much deficit reduction too soon, reach an agreement between Republicans and Democrats to raise the debt ceiling and craft a plan to reduce debt over the medium term, according to the report.
While the forecast for Japan was left unchanged at 1.2 per cent this year amid fiscal and monetary plans to stimulate its economy, the fund cut the 2014 prediction by to 0.7 per cent.
Fiscal expansion is "going to help growth in the short run, no question," Mr Blanchard said. At the same time "when you start with such a level of debt and without a medium term credible fiscal consolidation plan, increasing the fiscal deficit in the short run is a very risky thing to do."
Commodities exporters will feel the pinch of falling prices, with oil now seen slipping 5.1 per cent instead of 1 per cent, according to the report.
While supportive policies have help buoy growth in some emerging market countries in recent months, there's less space for such action now, it said.
Growth forecasts for Brazil were cut to 3.5 per cent this year from 4 per cent and to 4 per cent from 4.2 per cent in 2014. India was lowered 0.1 percentage point to 5.9 per cent this year and was left unchanged at 6.4 per cent in 2014.
The IMF didn't change its forecast for China, seen growing 8.2 per cent this year and 8.5 per cent in 2014.
"It's not the rates that we saw before the crisis, but these rates are long gone," Mr Blanchard said of emerging countries. "Things in general are fine."
Bloomberg
