The International Monetary Fund cut its forecast for U.S. economic growth on Friday and warned Washington and debt-ridden European countries that they are “playing with fire” unless they take immediate steps to reduce their budget deficits.
Financial market turmoil has prompted the International Monetary Fund to warn of growing threats to the world economic recovery.
The agency has trimmed its growth forecasts, and after a week of mounting fears over Europe’s debt crisis, it last night said there was an increased risk that the region’s sovereign debt woes would spill over into global financial markets.
It also pared back its forecast for 2011 growth, from 4.4 per cent to 4.3 per cent, due to weakness in the US and fallout from Japan’s tsunami disaster.
In an update to its World Economic Outlook, the fund noted deepening market fears of a slow-down in the US, as the world’s biggest economy struggles with persistent unemployment.
While it remained upbeat about growth in Australia’s key trading-partner countries, the fund said setbacks in Europe or the US could have serious consequences for the whole world.
”If these risks materialise, they will reverberate across the rest of the world, possibly seriously impairing funding conditions for banks and corporations in advanced economies and undercutting capital flows to emerging economies,” it said.
”Banks in advanced economies continue to face a wall of refinancing requirements, and a squeeze on banks’ wholesale funding could reverse the recent normalisation in lending standards.”
The downbeat commentary comes after a skittish week on financial markets, with the Australian sharemarket at its lowest since September. The S&P/ASX 200 Index has fallen close to 10 per cent since April, and yesterday closed 5.7 points higher at 4484.9.
Despite the market instability, the IMF was upbeat about Asia, holding its 2011 growth forecasts for China and India steady at 9.6 per cent and 8.2 per cent respectively.
Treasurer Wayne Swan said the report confirmed Australia’s outlook remained strong, helped by an estimated $430 billion in planned mining investment.
”While the IMF acknowledges that recent natural disasters and lingering effects of the GFC have led to some short-term softness in the economy and lower budget revenues, our economic scorecard remains the envy of the developed world,” Mr Swan said.
After Greece this week warned it might default unless bailed out again, IMF chief economist Olivier Blanchard was pessimistic about the long-term outlook of ”peripheral” European countries that recently suffered credit rating downgrades.
”They have very high debt, very large deficits and very low growth, and so there’s absolutely no question it’s going to take a very long time for them to return to health,” Mr Blanchard said.
Unemployment would remain a problem in the US because of weak growth, he said, but he dismissed predictions of another US recession.
”Whenever the world slows down there’s going to be somebody who talks about a double dip, but we don’t see any reason to expect a double dip,” Mr Blanchard said.