IMF says Europe curbing global economy; hopeful on 2014

WASHINGTON Thu Jan 24, 2013 1:03am IST

Labourers work inside an iron factory on the outskirts of Jammu November 12, 2012. REUTERS/Mukesh Gupta/Files

Labourers work inside an iron factory on the outskirts of Jammu November 12, 2012.

Credit: Reuters/Mukesh Gupta/Files

WASHINGTON (Reuters) - An unexpectedly stubborn euro zone recession and weakness in Japan will weigh on global economic growth this year before a rebound in 2014 that should deliver the fastest expansion since 2010, the International Monetary Fund said on Wednesday.

The IMF trimmed its 2013 forecast for global growth to 3.5 percent from the 3.6 percent it projected in October, but said it looked for expansion of 4.1 percent in 2014 if the euro zone recovery takes a firm hold. It said the world economy grew 3.2 percent last year.

Healthy global growth rates of above 4 percent were last seen in 2010, when output expanded 5.1 percent as the financial crisis eased.

"Optimism is in the air, particularly in financial markets, and some cautious optimism may indeed be justified," the IMF's chief economist, Olivier Blanchard, said at a news conference.

"Comparing to where we were at the same time last year, acute risks have decreased," he said, noting that Washington had largely dodged the "fiscal cliff" of tax hikes and spending cuts that were seen as a risk to growth and that policy actions in Europe had helped calm the region's debt crisis.

Still, the IMF warned that big downside risks remain, including that the euro zone's crisis could flare anew and the U.S. Congress could tighten the budget excessively.

"We may have avoided the cliffs, but we still face high mountains," Blanchard said.

Christine Lagarde, the IMF's managing director, speaking at the World Economic Forum in Davos, Switzerland, said the global economic recovery is still weak and uncertainty still high. She urged global finance leaders to keep up the momentum on policy changes to put uncertainty to rest, saying that "2013 will be a make-or-break year."

The United States is due to run out of borrowing room under a self-imposed limit of $16.4 trillion sometime between mid-February and early March, and it still faces steep automatic spending cuts on March 1 absent action.

The U.S. House of Representatives on Wednesday passed a bill that suspends the debt limit until May 19, a move that is likely to defuse immediate fears of a damaging U.S. debt default though not removing a longer-term threat.

The IMF said the U.S. economy was set to expand 2 percent this year, with growth rising above trend in the second half of this year and reaching 3 percent in 2014.

"The priority is to avoid excessive fiscal consolidation in the short term, promptly raising the debt ceiling, and agree on a credible medium-term fiscal consolidation plan focused on entitlement and tax reform," it said.

POLICY CHALLENGES FOR EUROPE, JAPAN

For advanced economies as a whole, the IMF said activity would likely remain weak this year with growth of just 1.4 percent, before strengthening to 2.2 percent in 2014. Blanchard said growth would be too tepid this year to lower unemployment in advanced economies.

The IMF said a prolonged stagnation in the euro zone is a threat, especially if the currency bloc fails to complete fiscal and banking reforms.

In Japan, the IMF said the economy is likely to manage 1.2 percent growth this year, helped by fiscal stimulus, an easing of monetary policy and a weaker yen, But it warned that growth was likely to slow to 0.7 percent in 2014.

It urged Tokyo to adopt a more ambitious monetary policy easing and a "credible" medium-term plan to tighten its budget.

Blanchard dismissed reports that easy monetary policy in advanced economies risked sparking a "currency war."

"I think this increasing talk of currency wars is very much overblown," Blanchard said, also dismissing reports of a sea change in emerging market capital flows.

Meanwhile, growth in emerging and developing economies should strengthen to 5.5 percent this year and 5.9 percent in 2014, the IMF said, adding that supportive policies had helped boost growth although weak demand from trading partners would still be a problem.

The pace of growth in China was set to increase to 8.2 percent this year and 8.5 percent in 2014, up from 2012 but still lower than the 10 percent growth notched in 2010, the fund said.

Developing Asia, including China and India, will remain the fastest-growing region in the world, according to IMF forecast, with growth of 7.1 percent this year and 7.5 percent in 2014.

Africa, with growth likely around 5.8 percent this year and 5.7 percent next year, is the world's second-fastest growing region.

(Reporting by Lesley Wroughton; editing by Neil Stempleman, Nick Zieminski and Leslie Adler)

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