IMF Releases Gloomy Report on the Global Economy

on Oct 9, 2012

Global growth forecasts have been cut by the IMF as the US and the Eurozone continuously fail to tackle their fiscal woes, while other major developing countries also suffer from dried up trade.

The fund lowered its growth prognosis from 3.5 percent this year and 3.9 percent in 2013 by 0.2 and 0.3 points respectively. These estimates hold true only with the assumption that the US Congress will dodge the January “fiscal cliff” and Eurozone governments in distress will follow through with economic reforms and take advantage of the European Central Bank bond-buying programme.

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The IMF report, as picked out by the FT, stated that “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 answer depends on whether European and US policy makers can deal proactively with their major short-term economic challenges.”

The fund slashed Britain’s growth outlook from a 0.2 percent growth to a contraction of 0.4 percent and advised the UK to defer spending cuts planned for next year if growth turns out to be even weaker than forecasted. According to the IMF, the first measure to be taken is for the Bank of England to loosen its monetary policy and the government to allow total unemployment benefit payments to rise if joblessness increased.

!m[](/uploads/story/543/thumbs/Pic1_inline.png)If this fails, present Chancellor George Osborne must consider postponing some of the planned spending cuts to future years, despite an already overwhelming belief that he will not manage to eliminate the structural budget deficit of UK within the promised five years. Mr Osborne seems to be stern on his reforms and observers are doubtful on whether he will listen to the IMF.

“Our critics would gamble everything … on the dubious idea that a few billion more of spending would dramatically improve the fortunes of the trillion-and-a-half pound British economy,” said the Chancellor on Monday at the Conservative Party’s annual conference.
Mr Osborne also told the conference that extra cuts will be required until 2018 so as to reduce UK’s structural debt sufficiently. According to the fund’s forecasts, Britain’s budget deficit would amount to 8.2 percent of GDP this year and 7.3 percent in 2013.
Greece, which has revealed a draconian 2013 budget, has been given 10 days by its international creditors the EU and the IMF to implement much of the promised reforms – a requirement for the next cash injection.
“We stressed that before the next disbursement Greece clearly and credibly should demonstrate its commitment to fully implement the programme – and 89 prior actions from March should be implemented by the 18th of October at the latest,” said Jean-Claude Juncker, chairman of Eurogroup. The Telegraph reported that those prior actions involve large reforms to the labour market, curing bureaucratic red-tape and major privatisations. Last week Greek Prime Minister Antonio Samaras said the state coffer will soon be empty unless the country receives the expected aid instalment of €31.5 billion (£25.5 billion).
The IMF also strongly urged the European Stability Mechanism (ESM), almost blocked by a German court, to be made operational as soon as possible as to inject fresh capital in the Eurozone periphery countries. The ESM and the European Financial Stability Facility are the two vehicles that provide funds to Eurozone members at reasonable cost but only if the borrowers adhere to strict austerity policies.


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