The IMF stepped up its warnings on Monday on risks to the global economy, mainly from the crisis-mired eurozone, as it trimmed its growth forecast for the rest of the year.
IMF economists said that the frail situations in Spain and Italy especially could quickly turn worse amid market doubts over leaders’ resolve in the single currency economic bloc in implementing pledged reforms, but they also pointed to the US “fiscal cliff” trajectory which, if not corrected, could crunch the US economy and heavily impact the rest of the world.
“In the past three months, the global recovery, which was not strong to start with, has shown signs of further weakness,” the fund said in its quarterly economic forecast.
“Financial market and sovereign stress in the euro-area periphery have ratcheted up,” it said, while growth has fallen below expectations in a number of major emerging-market economies.
If policy reactions in major economies remain inadequate or too slow, the IMF said, fissures could deepen.
“The main risk is obvious,” IMF chief economist Olivier Blanchard told reporters. “It is that the vicious circle in Spain and Italy becomes stronger, that output falls even more than it does, that one of these countries loses its financial access to markets … The implications of such an event could easily derail the world recovery.”
The IMF said that largely due to sharper-than-expected slowdowns in newly industrialized Asia and in large emerging economies like China and Brazil, it had cut 0.1 percent off its April forecast for global growth, to a rounded 3.5 percent.
For next year, the forecast is 3.9 percent, down from 4.1 percent.
Emerging economies were largely taking correct measures to halt slowdowns, the IMF said, but many “have also been hit by increases in investor risk aversion and perceived growth uncertainty, which have led not only to equity price declines, but also to capital outflows and currency depreciation.”
Growth forecasts were also cut for the US to 2.0 percent; Britain to 0.2 percent and France to 0.3 percent. In Spain, recession will persist through 2013, the Fund said.
On the bright side, the global financial body said, forecasts for this year for Germany and Japan were revised higher — to 1.0 percent and 2.4 percent, respectively — though the 2013 prediction for each was also trimmed slightly.
Meanwhile, the IMF singled out the overhanging risk from US political stasis that could send the country over a “fiscal cliff” due to laws that, if not changed, will force massive government spending cuts coupled with automatic tax hikes on Jan. 1 next year which would severely crunch the world’s largest economy.