* IMF cuts forecasts for second time since April
* Sets tone for meeting of world’s financial chiefs
* U.S. “fiscal cliff”, Europe’s debt crisis top issues
* World growth back at 2009 levels, euro area shrinking-IMF
* Cuts China, India, Brazil forecasts, says no hard landing
By Emily Kaiser and Lesley Wroughton
TOKYO, Oct 9 (Reuters) – The IMF said the global economic
slowdown is worsening as it cut its growth forecasts for the
second time since April and warned U.S. and European
policymakers that failure to fix their economic ills would
prolong the slump.
Global growth in advanced economies is too weak to bring
down unemployment and what little momentum exists is coming
primarily from central banks, the International Monetary Fund
said in its World Economic Outlook, released ahead of its
twice-yearly meeting, which will be held in Tokyo later this
week.
“A key issue is whether the global economy is just hitting
another bout of turbulence in what was always expected to be a
slow and bumpy recovery or whether the current slowdown has a
more lasting component,” it said.
“The answer depends on whether European and U.S.
policymakers deal proactively with their major short-term
economic challenges.”
Ahead of the Tokyo meeting, policymakers have flagged the
U.S. “fiscal cliff” — government spending cuts and tax raises
due to take affect early in 2013 — and resolving the euro
area’s debt crisis as the top issues facing the global economy.
Europe’s debt crisis is “a clear and present danger”,
Canadian Finance Minister Jim Flaherty said last week.
The IMF forecast in its latest health check on the world
economy that global output in 2012 would grow just 3.3 percent,
down from a July estimate of 3.5 percent.
That would make this the slowest year of growth since 2009
when the world was struggling to pull out of the global
financial crisis. It predicted only a modest pickup next year to
3.6 percent, below its July estimate of 3.9 percent.
It projected U.S. growth would be a little more than 2
percent this year and next, but forecast a contraction in the
euro area this year by 0.4 percent and modest growth in 2013 of
0.2 percent.
Emerging markets are still expected to grow four times as
fast as advanced economies, but the IMF took a sharp knife to
its estimates for India and Brazil, with the latter now seen
growing slower than the United States this year.
It also cut its expectations for China in 2012 and 2013 but
warned against being overly pessimistic about the prospects of
these economies, which were major engines of growth in the
global financial crisis.
“Let me be clear. We do not see these developments as signs
of a hard landing in any of these countries,” IMF Chief
Economist Olivier Blanchard said at a briefing, referring to
China, India and Brazil.
MORE AT WORK
The IMF said “familiar” forces were dragging down advanced
economy growth: fiscal consolidation and a still-weak financial
system, the same problems that have plagued the world since the
global financial crisis exploded in 2008.
“More seems to be at work, however, than these mechanical
forces – namely, a general feeling of uncertainty,” Blanchard
said in a commentary on the forecasts.
Measures of risk and uncertainty, such as the VIX volatility
gauge in the United States, remain at low levels, Blanchard
pointed out, which makes it difficult to assess the nature of
the uncertainty.
“Worries about the ability of European policymakers to
control the euro crisis and worries about the failure to date of
U.S. policymakers to agree on a fiscal plan surely play an
important role, but one that is hard to nail down,” Blanchard
said.
Concerns about the health of the global economy and
corporate earnings prospects have weighed on financial markets.
World shares as measured by the MSCI world equity index
fell 0.7 percent on Monday. The index was flat
in Asia on Tuesday.
S&P; 500 earnings for the third quarter are forecast to have
fallen more than 2 percent from the year-earlier period, which
would be the first decline in three years, Thomson Reuters data
shows.
The IMF said financial conditions are likely to remain “very
fragile” over the near term because repairing euro zone problems
will take time and there are concerns about how the U.S. economy
will cope with the expected spending cuts and tax increases.
The “urgent policy priorities” for the United States should
include avoiding the fiscal cliff, which the IMF said at the
extreme would amount to a fiscal withdrawal of more than 4
percent of GDP in 2013, and economic growth would stall.
“Both sides of the political isle (should) signal that they
are willing to compromise and that they’re willing to get this
done … that could help lower the level of uncertainty that is
affecting U.S. investors and consumers,” IMF First Deputy
Managing Director David Lipton told Reuters in an interview on
Monday.
Resolving the euro area crisis would require progress in
adopting and implementing the various measures discussed,
including banking and fiscal union, the IMF report said.
“If the complex puzzle can be rapidly completed, one can
reasonably hope that the worst might be behind us,” Blanchard
said.
Euro zone finance ministers on Monday unveiled the European
Stability Mechanism (ESM), a 500 billion euro rescue mechanism
for lending to distressed economies in the 17-country bloc.
But perhaps the biggest contagion risk for the region is
Spain, which a British finance ministry source suggested will be
the top issue for finance ministers in Tokyo.
“We have always been very clear that the euro zone needs to
take significant action,” the source said.
The euro zone has already set aside 100 billion euros for
Spain to recapitalise its banks but financial markets believe a
government bailout will follow in coming weeks or months.
