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IMF cuts global growth forecast

Published January 24, 2012 9:43 pm

Europe • Debt crisis in euro area intensifies, fund says.
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The International Monetary Fund cut its forecast for global growth and warned that the European debt crisis threatens to derail the world economy.

"The epicenter of the danger is Europe, but the rest of the world is increasingly affected," Olivier Blanchard, the fund's chief economist, said Tuesday at a news conference in Washington. "There's an even greater danger, namely that the European crisis intensifies. In this case the world could be plunged into another recession."

The fund lowered its estimate for global growth this year to 3.3 percent from a September forecast of 4 percent. The expansion next year will be 3.9 percent, down from 4.5 percent. The euro area may enter a "mild recession" in 2012 as it shrinks 0.5 percent. The U.S. outlook was unchanged at 1.8 percent growth.

The forecasts hinge on increased efforts in the 17-country euro area to fight the financial turmoil, the IMF report said. It called on European policymakers to increase the size of the region's rescue fund and for the European Central Bank to continue its support of the region to limit contagion to other countries.

Stocks fell as talks over Greek debt restructuring reached a stalemate. The Standard & Poor's 500 Index lost 0.1 percent to 1,314.65 in New York, paring a drop of as much as 0.8 percent.

"The near-term outlook has noticeably deteriorated," the IMF said in an update of its World Economic Outlook report. "The global recovery is threatened by intensifying strains in the euro area and fragilities elsewhere."

Confidence in Europe's strategy for coping with the crisis was dealt a setback late Monday in Brussels when European finance ministers pushed bondholders to provide greater debt relief for Greece.

Euro governments sought to fill a deeper-than-expected hole in Greece's finances by saddling investors with a lower interest rate on exchanged bonds, setting up a confrontation in the run-up to a Jan. 30 European Union summit. At the same time, efforts to shore up Greece were flanked by headway on a German-inspired deficit-reduction treaty and indications that a cap on rescue lending might be boosted.

To avoid a 1930s-style worldwide depression, the IMF Managing Director Christine Lagarde had called on other countries to play their part. The IMF, which co-finances loans to Greece, Ireland and Portugal, identified a potential global financing need of $1 trillion in coming years and is seeking $500 billion in new lending resources from its member countries to address potential loan demand.

The IMF predicts growth of 5.4 percent in developing economies this year, down from 6.1 percent forecast in September, reflecting "the deterioration in the external environment, as well as the slowdown in domestic demand in key emerging economies," according to the report.