Published On: Wed, Sep 21st, 2011

Global Economy in a Dngerous Phase: IMF

Portraying a gloomy outlook for the global economy, International Monetary Fund (IMF) today said that it is in a dangerous phase as business activity has weakened and confidence has fallen sharply.

Global growth will moderate to about 4 per cent through 2012, from over 5 per cent in 2010, IMF said in the World Economic Outlook report released today.

“The global economy is in a dangerous new phase. Global activity has weakened and become more uneven, confidence has fallen sharply recently, and downside risks are growing,” the IMF said ahead of its annual meeting here this week.

It noted that the structural problems facing crisis-hit advanced economies have proven even more intractable than expected, and the process of devising and implementing reforms even more complicated.

The report said the outlook for these economies is, thus, for a continuing, but weak and bumpy expansion.

“Prospects for emerging market economies have become more uncertain again, although growth is expected to remain fairly robust, especially in economies that can counter the effect on output of weaker foreign demand with less policy tightening,” it said.

Real GDP in the advanced economies is projected to expand at an anaemic pace of about 1.5 per cent in 2011 and 2 per cent in 2012, helped by a gradual unwinding of the temporary forces that have held back activity during much of the second quarter of 2011, IMF said.

However, IMF added, this assumes that Europe will contain the crisis in the euro zone, that US policymakers will strike a judicious balance between support for the economy and medium-term fiscal consolidation, and that the volatility in global financial markets does not escalate.

Moreover, the removal of monetary accommodation in advanced economies is now expected to pause.

“Under such a scenario, emerging capacity constraints and policy tightening, much of which has already happened, would lower growth rates in emerging and developing economies to a still very solid pace of about 6 per cent in 2012,” it said.

IMF observed that the crisis in the euro zone runs beyond the control of policymakers, notwithstanding the strong policy response agreed at the July 21 EU summit.

It added that they must swiftly ratify the commitments made at the summit, and in the meantime, the European Central Bank (ECB) must continue to intervene strongly to maintain orderly conditions in sovereign debt markets.

IMF said the business activity in the US, already softening, might suffer further blows -— a political impasse over fiscal consolidation, a weak housing market, rapid increases in household saving rates, and/or deteriorating financial conditions.

“Deep political divisions leave the course of US policy highly uncertain. There is a serious risk that hasty fiscal cutbacks will further weaken the outlook without providing the long-term reforms required to reduce debt to more sustainable levels,” it added.

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