IMF cuts global outlook, urges ECB to do more to ease debt crisis

IMF cuts global outlook, urges ECB to do more to ease debt crisis




The International Monetary Fund is calling on the European Central Bank to do more to ease the euro-zone debt crisis, which the fund says is the biggest risk facing the global economy.

“There is room for monetary policy in the euro area to ease further,” the IMF says in a new economic outlook that foresees weaker growth through 2013 than was forecast in April.



The ECB two weeks ago dropped its benchmark rate by a quarter point to a record low 0.75 per cent and told banks that it would no longer pay interest on deposits. Some investors and economists were disappointed, saying the ECB could have done more. The addition of the IMF to the chorus puts further pressure on ECB president Mario Draghi to take on an even more prominent role in solving the debt crisis, which the fund characterizes as the paramount risk facing the global economy.

“The utmost priority is to resolve the crisis in the euro area,” the IMF says in its updated World Economic Outlook, released Monday in Washington.

The IMF predicts world gross domestic product will expand 3.9 per cent in 2013, compared with 4.1 per cent in April. (The fund’s estimate for growth in 2012 is unchanged at 3.5 per cent because the global economy grew faster than anticipated in the first quarter, offsetting the current deterioration that set in during the second quarter.)

Europe’s struggles are the primary cause of the world’s economic decline, unsettling financial markets and diminishing global trade.

The fund predicts the combined GDP of the 17 countries that use the euro will contract by 0.3 per cent this year and grow a meagre 0.7 per cent in 2013. That’s taking a toll on the region’s neighbours and those countries that rely on exports for growth. The IMF predicts Britain’s economy will grow 0.2 per cent in 2012, compared with a forecast of 0.8 per cent in April. The fund’s 2012 outlooks for China, India and Brazil were cut by 0.2 percentage point, 0.7 percentage point, and 0.6 percentage point respectively.

The fund’s economic growth forecast for Canada is little changed at 2.1 per cent this year and 2.2 per cent in 2013. The IMF shaved its outlook for the United States to 2 per cent in 2012 and 2.3 per cent next year.

Bright spots in the outlook are few. Mexico’s GDP is projected to expand 3.9 per cent this year, an improvement on the IMF’s April estimate of 3.6 per cent. The IMF boosted its forecast for growth in the Middle East and North Africa this year by 1.3 percentage points to 5.5 per cent. However, the IMF sees little economic momentum in 2013, and says further deterioration is a more likely scenario than a positive turn.

“Downside risks continue to loom large, importantly reflecting risks of delayed or insufficient policy action,” the fund says in the report.

Europe isn’t the only region that troubles the IMF, nor is it the only place where the fund perceives that policy makers could be doing more.

The IMF’s projections are based on the assumption that U.S. lawmakers will do something to avoid the “fiscal cliff,” a combination of legislated spending cuts and tax increases that would narrow the budget deficit by four percentage points of GDP in 2013.

The IMF says the U.S. must do something to get its growing debt burden under control, but dose of fiscal prudence that extreme is more than the country’s weak economy can handle. “U.S. growth would then stall next year, with significant spillovers to the rest of the world,” the report says.

Another worry is slowing growth in emerging markets. China’s economy is now on track to advance 8 per cent in 2012, compared with 9.2 per cent last year and 10.4 per cent in 2010. The IMF projects India’s economy to grow 6.1 per cent this year, compared with 7 per cent in 2011; Brazil, the biggest economy in Latin America, is seen growing less than three per cent for a second consecutive year after expanding 7.5 per cent in 2010.

The immediate weakness in emerging markets appears to be the result of weaker global demand for exports and earlier efforts by policy makers to cool economies that were becoming inflationary. Those policies are now being at least partially reversed, suggesting demand in countries such as China and Brazil could pick up toward the end of the year.

Still, the IMF is expressing worry that these may be yet too undeveloped to pick up the slack from weaker growth in the U.S., Europe and Japan.

“Growth in these economies has been above historical trends over the past decade or so, supported in part by financial deepening and rapid credit growth, which may well have generated overly optimistic expectations about potential growth,” the IMF outlook says. “As a result, growth in emerging market economies could be lower than expected over the medium term, with a correspondingly smaller contribution to global growth.”

But for the most part, the global economy’s course in the near term will be dictated by events in Europe. The fund’s projections assume European leader will follow through on promises they made last month to use their dedicated rescue funds to bail out banks and to create a banking union. The IMF says leaders should go further, agreeing on a fiscal union and implementing structural changes to boost economic growth.

And, according to the IMF, the ECB must get over its conservative nature. At the end of last year and earlier this year, the ECB pushed hundreds of billions of euros into the financial system through extraordinary three-year lending programs.

The ECB should be prepared to revive that policy, or other “nonstandard measures,” including creating money to buy financial assets, the IMF said. That’s because low interest rates might not be enough to stimulate lending at a time when banks are worried about getting repaid, whether by struggling households and businesses or strained governments.

“The ECB should ensure that its monetary support is transmitted effectively across the region and should continue to provide ample liquidity support to banks under sufficiently lenient conditions,” the IMF outlook says.