IMF adds to global growth gloom

In its World Economic Outlook update, the fund said global output is expected to expand by 3.25 per cent in 2012, compared with its previous prediction of 4 per cent. It added growth is being threatened by “intensifying strains” in the euro areas as well as “fragilities” elsewhere.

The downward revision is largely down to the view the euro area will enter a “mild recession” this year because of rising sovereign yields, bank deleveraging and austerity measures.

Growth in the euro area is expected to fall by 0.5 per cent in 2012 - a stark 1.6 per cent downward revision from the IMF’s forecast made in September last year.

The UK is expected to grow 0.6 per cent this year. However, this figure is 1 percentage point lower than the IMF’s forecast in September.

Central and eastern European growth for 2012 is expected to be more robust at 1.1 per cent, although this is also a 1.6 percentage point fall from the level predicted by the IMF in September.

The IMF said growth in emerging and developing economies is also expected to slow because of the “worsening external environment and weakening internal demand”.

“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,” it said.

“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.

“In emerging and developing economies, near-term policy should focus on responding to moderating domestic growth and to slowing external demand from advanced economies.”

The body also warned against unnecessary austerity measures.

“Countries should let automatic stabilizers operate freely for as long as they can readily finance higher deficits,” it said.

“Among those countries, those with very low interest rates or other factors that create adequate fiscal space, including some in the euro area, should reconsider the pace of near-term fiscal consolidation.

“Overdoing fiscal adjustment in the short term to counter cyclical revenue losses will further undercut activity, diminish popular support for adjustment, and undermine market confidence.”

The fund also emphasised differences in the outlook for each of the major emerging economies.

“[Developing] economies where inflation is under control, public debt is not high, and external surpluses are appreciable (including China and selected emerging economies in Asia) can afford to deploy additional social spending to support poorer households in the face of weakening external demand.

“Economies with diminishing inflation pressure but weaker fiscal fundamentals (including various economies in Latin America) can afford to stop tightening or to ease monetary policy, provided they manage to control lending to overheating sectors (such as real estate) through macroprudential measures.

“Those that suffer from both relatively high inflation and public debt (including India and various economies in the Middle East) may need to take a more cautious stance on any policy easing.”