IMF cuts global outlook, warns of U.S. default threat

Sandrine Rastello and Jeanna Smialek

Published: Tuesday, Oct. 8 2013 11:53 a.m. MDT

In this photo released by the International Monetary Fund, IMF Managing Director Christine Lagarde, right, listens to German Finance Minister Wolfgang Schauble following the filming of the BBC World Debate "Rescuing the Global Economy: What next?" at the annual IMF and World Bank meetings in Tokyo Friday, Oct. 12, 2012.

Stephen Jaffe, IMF) EDITORIAL USE ONLY, Associated Press

Enlarge photo»

WASHINGTON — The International Monetary Fund cut its global outlook for this year and next as capital outflows further weaken emerging markets and warned that a U.S. government default could "seriously damage" the world economy.

Growth worldwide will be 2.9 percent this year and 3.6 percent next year, the IMF said in a report released Tuesday in Washington, compared with July predictions of 3.1 percent for 2013 and 3.8 percent for 2014. It sees emerging economies growing 4.5 percent this year, 0.5 percentage point less than three months ago, as projections were reduced for China, Mexico, India and Russia.

"Advanced economies are gradually strengthening" while "growth in emerging-market economies has slowed," IMF chief economist Olivier Blanchard wrote in a foreword to the World Economic Outlook report. "This confluence is leading to tensions, with emerging-market economies facing the dual challenges of slowing growth and tighter global financial conditions."

The IMF's forecasts factor in a short U.S. government shutdown and an agreement on the nation's debt-limit before an Oct. 17 deadline. A stalemate that causes a default "could seriously damage the global economy," the fund said.

President Obama reiterated Monday that he won't negotiate with Republicans over the partial shutdown and the U.S. debt limit as Senate Democrats began preparing for a test vote on a clean debt-ceiling bill. Many federal services have been shuttered for more than a week and the country is nine days away from running out of its ability to stay under a $16.7 trillion cap on borrowing.

"The effects of any failure to repay the debt would be felt right away, leading to potentially major disruptions in financial markets, both in the U.S. and abroad," Blanchard said during a news conference. "We see this as a tail risk, with low probability, but, were it to happen, it would have major consequences."

Responding to questions from reporters about the U.S. economy, he said, "if there was a problem lifting the debt ceiling, it could well be that what is now a recovery would turn into a recession, or even worse."

With Europe overcoming its debt crisis and a recovery of the U.S. housing market, global policy makers' concerns are shifting to the uncharted territory of exiting extraordinary monetary stimulus. Bond prices slumped internationally and emerging-market stocks plunged after May 22, when Federal Reserve Chairman Ben Bernanke said for the first time the Fed may trim its asset-purchase program within the next few meetings.

While those markets rebounded last month after the central bank refrained from paring its bond buying plans, the IMF said developing economies' sovereign yields are now 0.8 percentage point higher than at the beginning of the year.

"This change could pose risks for emerging-market economies, where activity is slowing and asset quality weakening," the IMF wrote in the report. "Careful policy implementation and clear communication on the part of the Federal Reserve will be essential."

The fund said its forecasts assume the Fed won't raise its benchmark interest rate, which has been near zero since December 2008, before 2016 and that the U.S. central bank will start tapering its bond-buying program later this year.

The IMF urged the world's major economies to adopt policies that will boost their prospects or face prolonged subdued expansion, especially at a time of weaker growth in China, which will hurt commodities exporters and other developing economies.

The U.S. needs better fiscal plans for the medium term, and the economic drag from across-the-board, automatic budget cuts this year may be bigger than the fund expected, according to the report. The IMF cut its growth forecast for the world's largest economy to 1.6 percent this year and 2.6 percent next year, each 0.1 percentage point less than forecast in July.

Get The Deseret News Everywhere

Subscribe

Mobile

RSS