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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

Japan, where the IMF maintained forecasts of 2 percent growth this year and 1.2 percent next year, also needs a strong budget plan for coming years, according to the fund. While the current fiscal and monetary stimulus is proving effective, the central bank should be prepared for another round of monetary stimulus if it doesn't manage to boost inflation expectations to its target of 2 percent, according to the fund.

The IMF raised its forecast for the 17-country euro area to a contraction of 0.4 percent this year compared with a 0.6 percent decline in July. It now expects an expansion of 1 percent next year instead of 0.9 percent three months ago. While Italy and Spain are expected to shrink this year, Spain's forecast contraction of 1.3 percent is an improvement from a 1.6 percent prediction three months ago.

Still, the region's financial industry remains fragile and next year's planned assessment of the banks' balance sheets by the European Central Bank "provides a critical opportunity to put the system on a sounder footing," the IMF said.

The euro-area's central bank should also consider giving additional monetary support through lower interest rates, forward guidance on future rates or negative deposit rates, it said.

The prospect of higher U.S. long-term interest rates and a partial reversal of capital flows is leaving emerging markets with weak fiscal positions or higher inflation particularly exposed, the fund said.

"First, where needed, countries must put their macro houses in order by clarifying their monetary policy framework and maintaining fiscal sustainability," Blanchard wrote. "Second, they must let the exchange-rate depreciate in response to outflows."

The fund cut the forecast for China to 7.6 percent this year, from 7.8 percent in July and to 7.3 percent in 2014 from 7.7 percent.

"Without fundamental reform to rebalance the economy toward consumption and stimulate productivity growth through deregulation, growth is likely to slow considerably," the fund said of the world's second-largest economy.

Russia's growth model also seems "exhausted," according to the report, which sees growth at 1.5 percent this year instead of 2.5 percent in July and 3 percent next year, from 3.3 percent.

India will grow 3.8 percent this year, down from a July prediction of 5.6 percent, and 5.1 percent in 2014, from 6.3 percent. Mexico will expand 1.2 percent this year from 2.9 percent in July, and its outlook was cut to 3 percent next year from 3.2 percent.

_ With assistance from Ainhoa Goyeneche, Richard Rubin and James L. Tyson in Washington.

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