IMF warns of ‘alarmingly high’ risk of deep global slowdown

WASHINGTON -- The International Monetary Fund on Tuesday downgraded its economic projections and warned of an “alarmingly high” risk of a serious global slowdown because of fiscal problems in the U.S. and Europe.

The organization said world economic growth would be 3.3% this year, down from a projected 3.5% in July, and would improve to just 3.6% in 2013, down from a forecast of 3.9% made three months ago.

Similarly, projections for growth in advanced economies slipped to 1.3% this year, compared to 1.4% in the July forecast, and 1.5% next year, down from 1.8%.

The IMF actually boosted its forecast for U.S. economic growth this year to 2.2%, from 2.1% in its July World Economic Outlook. But the European debt crisis dragged down its global projections.

Economies in the euro zone are projected to contract 0.4% this year, down 0.1 percentage points from July. And while the recession in Europe will end in 2013, growth is forecast to be a minuscule 0.2%, compared with a July projection of 0.7%.

The struggles of the world’s most developed economies, and looming threats such as the fiscal cliff in the U.S., are dragging down the rest of the world, the IMF said.

“Low growth and uncertainty in advanced economies are affecting emerging market and developing economies through both trade and financial channels, adding to homegrown weaknesses,” said IMF Chief Economist Olivier Blanchard in releasing the group’s World Economic Outlook.

The IMF said there is a rising risk -- about a 17% chance -- that global economic growth will fall below 2% in 2013, which would be consistent with a recession in advanced economies and a serious slowdown in emerging and developing markets.

The risk of a 2013 recession is about 15% in the U.S., but more than 80% in the euro zone, the IMF said.

The risk for a deep global economic slowdown next year is “alarmingly high” because of several short term factors, the IMF said. The most serious are a further deepening of the European debt crisis, failure in Washington to avert large tax hikes and government spending cuts looming in January, and another spike in oil prices caused by Middle East tensions.

“A key issue is whether the global economy is just hitting another bout of turbulence in what was always expected to be a slow and bumpy recovery or whether the current slowdown has a more lasting component,” the IMF said.

“The answer depends on whether European and U.S. policymakers deal proactively with their major short-term economic challenges.”

US Real GDP Growth data by YCharts

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