IMF lowers global growth forecast

The global forecasts are based on two important assumptions, the IMF cautions. First, that there will be sufficient policy action to allow financial conditions in the euro area to ease gradually. And, second, that recent policy easing in emerging market economies will gain traction. “Clearly, downside risks continue to loom large, importantly reflecting risks of delayed or insufficient policy action,” it says.

In a separate report, the IMF says that risks to financial stability have increased since April, with sovereign yields in southern Europe rising sharply, and elevated funding and market pressures posing risks to the credit supply. Uncertainties on the fiscal outlook and federal debt ceiling in the U.S. also “present a latent risk to financial stability”, it adds.

Moreover, with growth prospects weakening elsewhere, other countries are less able to deal with spillovers from the euro area crisis or to address their own home-grown fiscal and financial vulnerabilities, it says.

For Europe, the measures announced at the European Union leaders’ summit in June are “steps in the right direction”, the IMF says. However, it notes that recent deterioration in sovereign debt markets “underscores that timely implementation of these measures, together with further progress on banking and fiscal union, must be a priority.”

It also says that uncertainties about the asset quality of banks’ balance sheets must be resolved quickly, “with capital injections and restructurings where needed”.

In the US, it says that action to avoid the “fiscal cliff”, along with promptly raising the debt ceiling, and developing a medium-term fiscal plan are “of the essence”.

Additionally, policymakers in emerging market economies “should be ready to cope with trade declines and the high volatility of capital flows”, the IMF says.

Deutsche Bank cuts global economic forecast

Separately, Deutsche Bank economists have cut their global economic forecast, largely due to ongoing uncertainty in the Euro area, which has led to increased risk aversion worldwide.

In a new report, Deutsche Bank Research says that it has lowered its global growth forecast by three-tenths of a percentage point for 2012 and four-tenths for 2013. “Overall, we see a global economy that is set to decelerate to 3.2% growth in 2012, yet likely to edge back up to 3.5% in 2013,” it says. “However, this means the growth rate will probably fall far short of its pre-crisis trend of about 4%.”

Within the advanced economies, Europe is still expected to be in recession this year and close to recession again in 2013, but it still sees U.S. growth picking up to moderately above trend in 2013. And, for Europe it expects that the worst will be over by later this year, with growth picking up modestly in 2013. “Nonetheless, the downside risks will probably still outweigh the upside in this forecast,” it cautions.

In addition to the European fiscal crisis, the report notes that the U.S. fiscal contraction has proceeded somewhat faster than expected, contributing “to a surprisingly sluggish performance of the labour market”. Additionally, it says that uncertainties surrounding “the looming U.S. fiscal cliff and how both taxes and spending will be reformed to address the longer-term U.S. fiscal challenge have caused businesses and even some households to cut back their spending plans.”

Emerging markets are seeing growth headwinds too, it says. “The growth forecasts for China, India and Brazil have been marked down substantially for this year and in some cases for next year as well. In China and India, the slowdowns in response to past policy tightening have been greater than we had expected and the ensuing policy stimulus more timid than expected. In India’s case this is due in particular to persistently elevated inflation pressures,” it says.

The firm also sees global inflation slowing significantly this year, from last year’s elevated pace, “thanks in large part to a sharp easing of commodity price pressures. We have global inflation edging higher next year as commodity prices recover to some extent.”

In terms of interest rates, Deutsche says that it does not expect the U.S. Federal Reserve Board to ease any further, but it does see the European Central Bank acting to boost liquidity once again, “since the political measures proposed to address the economic imbalances will require a long time to be implemented and there may be a considerable number of obstacles along the way.”