IMF: World economy weakens further

Plagued by uncertainty and fresh setbacks, the world economy has weakened further and will grow more slowly over the next year, the International Monetary Fund says in its latest forecast.

Advanced economies are risking recession, the international lending organisation said in a quarterly update of its World Economic Outlook, and the malaise is spreading to more dynamic emerging economies such as China.

The IMF forecasts that the world economy will expand 3.3% this year, down from the estimate of 3.5% issued in July. Its forecast for growth next year is 3.6%, down from 3.9% three months ago and 4.1% in April.

Underpinning that bleaker scenario are the assumptions that Europe will continue to ease monetary policy and that the US will avert a crushing blow to growth by fending off a so-called "fiscal cliff" that could result from a failure to reach a compromise on its budget law and tax cuts. Conditions could worsen if the United States does not deal with its budget crisis soon, the IMF said. "Downside risks have increased and are considerable," the fund said, adding that its forecasts are based "on critical policy action in the euro area and the United States, and it is very difficult to estimate the probability that this action will materialise".

The IMF has urged the US to raise the ceiling on the level of debt the government can issue, which is capped by law. In August last year, a battle between the Obama administration and Congress over raising the limit was not resolved until the US almost defaulted on its debt.

Global efforts to ease credit and increase the amount of money available for lending are helping, but appear to be yielding diminishing returns, as are fiscal stimulus policies, the IMF warned. "Because uncertainty is high, confidence is low, and financial sectors are weak, the significant fiscal achievements have been accompanied by disappointing growth or recessions," it said.

Among other things, it says governments need to do more to relieve the burden of household debt that is constraining spending power and thus crippling demand. While large corporations pay record low rates for credit, households and small companies struggle to obtain bank loans, it said.

Fortifying domestic demand is all the more crucial given weakening trade trends. The IMF forecasts that growth in world trade volume will slump to 3.2% this year from 5.8% last year and 12.6% in 2010. "Low growth and uncertainty in advanced economies are affecting emerging market and developing economies through both trade and financial channels, adding to homegrown weaknesses," the IMF's chief economist, Olivier Blanchard, said in a statement.

Still, the IMF raised the US growth forecast slightly, to 2.2% this year from 2% in July. For next year, though, it expects US growth of 2.1%, down from 2.3%.

Among the 17 nations that use the euro, low growth in the major "core economies", such as Germany and France, will be offset by outright contractions in the smaller economies, leading real gross domestic product to fall by about 0.4% in 2012, the IMF said. It forecasts growth in the euro area will stay flat in the first half of next year and tick up to about 1% in the second half of the year.