IMF cuts US growth forecast, warns of crisis

The IMF, in its regular assessment of global economic prospects, said bigger threats to growth had emerged since its previous report in April, citing the euro zone debt crisis and signs of overheating in emerging market economies.

The global lender forecast that U.S. gross domestic product would grow an anemic 2.5 per cent this year and 2.7 per cent in 2012. In its forecast just two months ago, it had expected 2.8 per cent and 2.9 per cent growth, respectively.

The outlook elsewhere was mixed. The IMF said it was slightly more optimistic about the euro area’s growth prospects this year, but a lack of political leadership in dealing with that crisis and the budget showdown in the United States could create major financial volatility in coming months. Meanwhile, Greece has edged closer to default as euro zone officials disagree on a possible second aid package for the indebted country.  Strikes and protests around the country stoking fears that the government will not be able to tighten its belt enough to reduce crippling deficits.

Fears of contagion in the euro zone have driven global markets lower in recent sessions, with other vulnerable countries such as Ireland and Portugal feeling pressured. The IMF raised its growth view for the euro area in 2011 to 2 per cent from 1.6 per cent. For 2012, the IMF saw growth at 1.7 per cent, nearly stable from its previous 1.8 per cent.
It raised its forecast for Germany, the powerhouse of the euro zone, to 3.2 per cent from 2.5 per cent, with growth moderating to 2 per cent in 2012.

Forecasts for large emerging markets remained stable or slipped. While China’s GDP view stayed at 9.6 per cent this year, IMF lowered its forecast for Brazil to 4.1 per cent from 4.5 per cent in April.

Those countries, along with Russia, India and South Africa, make up the fast-growing BRICS, a group of emerging economies whose brisk expansion has outstripped that of developed markets recently.

Robust growth has caused emerging economies to tighten monetary policy, with higher interest rates. The IMF warned that many emerging markets still need more tightening. In China, for example, the high inflation rate means negative real interest rates.