IMF likely to cut growth estimates as uncertainty plagues global economy

Tue, Sep 25, 2012, 01:00

CHRISTINE LAGARDE, the managing director of the International Monetary Fund, yesterday warned that the institution would probably cut its estimates of global growth yet again this year because of the tepid US recovery, a slowdown in emerging economies and continued troubles in the euro zone.

Still, she praised the world’s central banks for taking decisive action to ease fraught financial conditions and aid the global recovery in recent months.

“It may well be that central banks will have played a significant role in pulling the global economy out of this great recession,” Ms Lagarde said in remarks prepared for a meeting at the Peterson Institute for International Economics, a Washington-based research group. “But we should not get ahead of ourselves.”

Ms Lagarde said the fund would “likely” trim its growth estimates in a periodic update to its economic forecasts, to be delivered at a joint meeting of the World Bank and the IMF in Tokyo next month. In its last estimate, made in July, the fund saw global economic growth of 3.5 per cent in 2012 and 3.9 per cent in 2013. The global economy grew about 4 per cent in 2011.

“Clearly, downside risks continue to loom large, importantly reflecting risks of delayed or insufficient policy action,” the fund said in its last estimate.

Ms Lagarde warned that “uncertainty” continued to plague the global economy, depressing growth in both high- and low-income countries.

She repeated her often-delivered message that European policymakers still have much work to do to forge a banking union and ease credit conditions in countries like Spain.

She also delivered a stark warning to US political leaders about the uncertainty over the so-called fiscal cliff, a spate of tax hikes and spending cuts that some economists say are large enough to throw the economy into recession next year.

“We all recognise that political calendars impact the timing of key decisions. This is true everywhere. But the current uncertainty presents a serious threat for the United States and, as the world’s largest economy, for the global economy,” Ms Lagarde said. “We all hope that political clarity emerges soon, and with it, actions to avoid the fiscal cliff and, also, a concrete plan to bring down debt gradually over the medium-term.”

Financial markets have cheered recent actions from the worlds central banks to help the economy. But Ms Lagarde’s comments and other recent reports underscore the continuing weakness. On Friday, the World Trade Organisation slashed its forecasts for global trade, cutting its estimate of trade growth in 2012 to 2.5 per cent from 3.7 per cent. It also slashed its 2013 estimate, to 4.5 per cent from 5.6 per cent.

“It seems likely that world trade will grow by less than world GDP this year,” Andrew Kenningham of Capital Economics, a global consultancy, said in a note to clients. “If so, this would be at least a temporary reversal of the globalisation process which has seen trade rise more rapidly than GDP over the past few decades.”

The slowdown in global trade poses a particular threat for a US recovery driven in part by export growth. – (New York Times service)