The IMF has lifted its forecast for global economic growth this year, but warned European sovereign debt risks were likely to slow the pace of recovery next year. It raised its global growth forecast to 4.6 per cent this year, up 0.4 percentage points from its last forecast in April, due to brisk economic activity in Asia in the first half of the year.
The global economy is expected to expand by 4.3 per cent next year amid the danger of renewed financial turbulence, mainly stemming from the possibility of Europe's sovereign debt crisis choking consumer and investor demand, it warned in its World Economic Outlook, which was released yesterday. It sees the MENA region expanding by 4.5 per cent this year before outpacing the global outlook next year with growth of 4.9 per cent, marginally better than the IMF's previous estimate.
"Looking forward, strong clouds have appeared on the horizon," said Olivier Blanchard, the chief economist at the IMF. "They present real dangers and serious policy challenges and give reasons to be less optimistic than we were earlier." Concerns first emerging about Greece's debt troubles in May have steadily escalated across the euro zone to other vulnerable economies such as Portugal, Spain, Ireland and Italy.
More recently, markets have been preoccupied with worries about cutbacks in government stimulus spending and fiscal consolidation, particularly in Europe, as well as the declining consumer confidence in the US and Europe. The renewed financial turbulence could spill over into the economy by curtailing the supply of bank credit and increasing funding costs due to uncertainty about financial sector exposure to sovereign risk. In addition, lower consumer and business confidence could suppress private consumption and investment, the IMF warned.
"Against this uncertain backdrop, the overarching policy challenge is to restore financial market confidence without choking the recovery," it said. In the euro area, this meant implementing co-ordinated policies to rebuild confidence, such as resolving uncertainty about bank exposures, ensuring European banks had adequate capital buffers and continuing liquidity support. Globally, policies should focus on implementing credible plans to lower fiscal deficits over the medium term while maintaining supportive monetary conditions, accelerating financial sector reform and rebalancing global demand, it said.
Both the UK and France saw their growth forecasts cut for this year by the IMF. Those two countries along with other euro area nations as well as Japan and Canada had their GDP estimates reduced for next year. "We have long viewed the euro zone as the weak link in the global economy, forecasting GDP growth of just 1 per cent this year," said Tim Fox, the chief economist of Emirates NBD. While the IMF's expectations for China's expansion next year have also been trimmed, it is from a higher growth base.
Nonetheless, the prospects of the global economy sinking back into a global recession are not expected by the Washington-based IMF. "Overall the forecasts from the IMF also support our contention that there will not be a double-dip recession, but that the recovery will be sluggish with growth staying below trend for some time to come," said Mr Fox. firstname.lastname@example.org