World growth improves, recovery fragile: IMF
REUTERS WASHINGTON GLOBAL growth is slowly improving as recovery in the United States gains traction and dangers from Europe recede, but risks remain elevated and the gains are very fragile, the Internatio10nal Monetary Fund said on Tuesday.
Another flare-up of the euro-zone sovereign debt crisis or sharp escalation in oil prices on geopolitical uncertainty could easily undermine confidence and disrupt the improving growth path for world economy, the IMF said.
“With the passing of the crisis and some good news about the US economy, some optimism has returned. It should remain tempered,” said Oliver Blanchard, the IMF’s chief economist, in the latest World Economic Outlook.
“Even absent another European crisis, most advanced economies still face major brakes on growth. And the risk of another crisis is still very much present and could well affect both advanced and emerging economies,” he said.
The global economy is on track to expand this year by 3.5 percent and by 4.1 percent in 2013, up slightly from 3.3 percent and 3.9 percent GDP output respectively that the IMF had forecast in January, when market concern was rampant that Greece could default and Italy and Spain were facing budget crises.
Since then, Greece has restructured its debt, Italy and Spain are adopting tough fiscal measures and eurozone leaders have agreed to enlarge their bailout fund, causing financial market tensions to ease.
The United States, meanwhile, is gradually gaining momentum while China and other emerging economies appear on track for gradual slowdowns without crashing, it said.
But the gains are precarious.
Should the euro zone crisis erupt once more, it could trigger a widespread dumping of risky assets and rob 2 percent from global growth over two years and 3.5 percent from the euro zone, the IMF warned.
Additionally, a 50 percent increase in the price of oil on would lower global output by 1.25 percent, the IMF said.
To secure the global recovery, the IMF urged central banks in the United States, euro zone and Japan to stand ready to deliver further monetary easing; governments to exercise caution over the pace of budget cutbacks wherever feasible; and Europe consider using public funds to recapitalize banks.
While European leaders have made ‘major progress’ in building firewalls against financial contagion, the region faces a tricky balance of cutting government debt and restoring competitiveness without excessively stifling growth, it warned.
European banks also are deleveraging, which will reduce their balance sheets by $2.6 trillion over the next two years and slice about 1 percent from growth this year alone.
“Bad news on the macroeconomic or political front still carries the risk of triggering the type of dynamics we saw last fall,” the IMF said.
The euro zone is likely to endure a mild recession this year, shrinking by 0.3 percent and then posting 0.9 percent growth in 2013, the IMF said.
That is a minor improvement from the 0.5 percent 2011 contraction followed by 0.8 percent growth that it forecast in January.