The International Monetary Fund has lowered its global growth forecast, and warns that downside risks are increasing.
The IMF is now forecasting that global output will expand by 3.25% in 2012, which represents a downward revision of about 0.75 percentage points relative to its last forecast back in September 2011. It has also cut its 2013 forecast to 3.9%, down 0.6%.
The organization said Tuesday that the weaker forecast is largely because “the euro area economy is now expected to go into a mild recession in 2012 as a result of the rise in sovereign yields, the effects of bank deleveraging on the real economy, and the impact of additional fiscal consolidation.”
Its forecast for Canada has been lowered to 1.7% growth this year and 2% next year, down by 0.2 and 0.5 percentage points, respectively, from its previous forecast.
The forecast notes that growth in emerging and developing economies is also expected to slow because of the worsening external environment and a weakening of internal demand. And it warns that, “The global recovery is threatened by intensifying strains in the euro area and fragilities elsewhere. Financial conditions have deteriorated, growth prospects have dimmed, and downside risks have escalated.”
The IMF says that the most immediate policy challenge is to restore confidence and put an end to the crisis in the euro area by “supporting growth, while sustaining adjustment, containing deleveraging, and providing more liquidity and monetary accommodation.”
In other major advanced economies, the key policy requirements are to address medium-term fiscal imbalances and to repair and reform financial systems, while sustaining the recovery, it adds. And, in emerging and developing economies, near-term policy “should focus on responding to moderating domestic growth and to slowing external demand from advanced economies,” it counsels.
At the same time, the IMF also says that risks to financial stability have increased, as sovereign financing remains challenging and downside risks remain. “If funding challenges result in a round of deleveraging by banks, this could ignite an adverse feedback loop to euro area economies. The United States and other advanced economies are susceptible to spillovers from a potential intensification of the euro area crisis, and some have homegrown challenges to the removal of financial tail risks, including overcoming political obstacles to achieving an appropriate pace of fiscal consolidation,” it says.
“Further policy actions are needed to restore market confidence. This effort will require building larger backstops for sovereign financing, assuring adequate bank funding and capital, and maintaining a sufficient flow of credit to the economy, possibly by establishing a ‘gatekeeper’ charged with preventing disorderly bank deleveraging,” it says.