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July 10, 2013

IMF Lowers Its Global Economic Prospects

by Mil Arcega

The International Monetary Fund has trimmed its outlook for the global economy. In its latest quarterly report, the IMF blamed the slowdown in part on what it called “continuing growth disappointments” in developing countries and a deeper than expected recession in Europe. The Washington-based agency said conditions are likely to improve as early as next year.

The world’s economy is not growing as fast as many had hoped. The IMF revised its global growth forecast in 2013 to just a bit more than 3 percent - down from earlier projections of 3.3 percent.

IMF chief economist Olivier Blanchard said the revisions are based on several factors.

“The main effect really comes from the slowdown in emerging market economies, but we are also revising down the euro area forecast,” said Blanchard.

Global demand for goods and services has declined - especially in Europe - where a debt crisis and tough austerity measures have produced the longest economic slump in the 17-nation eurozone’s history.

Peter McGuire, Asia market strategist at Baxter FX, said, "It is not surprising. When you think about as far as global demand, that seems to be softening, and of course with Europe in the position that it's been in, it's just protracted slowness to a point of nearly negative growth across the whole zone. “

It's a vicious circle. Reduced demand has slowed growth in faster-growing economies, particularly in the so-called BRIC countries - Brazil, Russia, India, and China.  

Blanchard said that has repercussions for advanced economies.

“If, for example, growth in BRICs was to go down by two percent relative to what we predict, then the effect on the U.S., for example, would be half a percent. So it matters,” he said.

The IMF has lowered expectations for U.S. growth, even though recent housing and employment data suggest slow but steady progress.  

Steady enough, say some analysts, for the Federal Reserve to scale back on monetary policies that have kept long-term interest rates at record lows.

Although rising U.S. interest rates could create difficulties for some countries, Blanchard said it also would signal a stronger recovery for the world’s largest economy.

“Along the way, you may have quite a bit of volatility, but on that, the bottom line remains the same, which is - it’s good news for the world.”

The IMF sees improving global economic conditions in 2014, but only if the world’s major economies continue to promote policies that foster near-term growth, while cutting long-term debt.