IMF tells world to act on economy in danger zone


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The Independent Online

The International Monetary Fund yesterday warned that the global economy is entering a "dangerous new phase" and called on politicians around the world to take decisive action to avoid large parts of the world slipping into another recession.

In its bi-annual World Economic Outlook, the fund lowered its global growth forecast to 4 per cent in 2011, down from 4.3 per cent in its last report in June. The fund also cut its expectations for international growth in 2012 by half a percentage point.

Slower than expected growth in advanced economies is responsible for the bulk of the downgrade. The IMF expects output in the US to expand by just 1.5 per cent in 2011, down from 2.5 per cent in June. American growth forecasts for 2012 are cut from 2.7 per cent to 1.8 per cent. Europe is also forecast to slow considerably with 2011 growth downgraded from 2 per cent to 1.6 per cent. And growth on the Continent next year is expected to slip to just 1.1 per cent, down from an already disappointing 1.7 per cent.

Developing countries, by contrast, are expected to expand by 6.4 per cent in 2011 and 6.1 per cent in 2012, representing a relatively modest downgrade on the IMF's June projections.

Unveiling the report in Washington yesterday, Olivier Blanchard, the chief economist of the IMF, stressed that the present disappointing growth rates will only materialise if global leaders implement their present policy commitments to reduce deficits and to reform their economies.

Explaining why growth has turned out lower than it forecast in June, the IMF report put the blame on the debt hangover from the last crisis. It said: "Tight bank lending, the legacy of the housing boom, and high leverage for many households all turn out to be putting stronger brakes on the recovery than we anticipated."

Another drag on growth, according to the IMF, has been the economic shock from the Japanese tsunami. The report also warns that the unresolved eurozone debt crisis now represents one of the dominant threats to the global economy.

Mr Blanchard warned European leaders to "get their act together" and resolve the crisis. The first step, he said, should be the rapid implementation of the July deal in Brussels to expand the powers of the European Financial Stability Facility.

Mr Blanchard also said that European banks holding large amounts of eurozone periphery debt should be recapitalised by national governments. He added that the European Central Bank has a "very important role" to play in keeping down the borrowing rates of Italy, by buying its sovereign bonds.

The IMF report also says that global macroeconomic imbalances, which played a key part in driving the last crisis, are reasserting themselves, putting stable global growth at risk.

The report argues that China and other nations that are running a chronic trade surplus need to import more and export less but that "this rebalancing act is not taking place".