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IMF Cuts Growth Forecast, Warns US on Borrowing Limit

IMF Cuts Growth Forecast, Warns US on Borrowing Limiti
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October 09, 2013 3:16 AM
The International Monetary Fund has trimmed its forecast for the global economy, citing slower growth in developing nations. While the estimates are down slightly from earlier projections, the IMF sees the global economy rebounding from 2.9 percent this year to 3.6 percent in 2014. For now, the biggest source of uncertainty may be the United States.

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The International Monetary Fund is cutting its forecast for economic growth throughout the world -- mostly because expansion has slowed in China, India, Brazil and other developing countries.

The IMF said Tuesday it expects the global economy to advance 2.9 percent this year and by 3.6 percent in 2014, both down from previous forecasts. The Washington-based agency said that economic growth had slowed or flattened throughout the world.

At the same time, the IMF's chief economist, Olivier Blanchard, warned there could be major financial disruptions throughout the world if the United States does not increase its borrowing limit in the coming days to avoid a default on its financial obligations. The U.S. government is in the midst of an eight-day partial shutdown and at the same time is running out of money to pay its bills.

U.S. financial officials said Congress needs to increase the country's $16.7 trillion debt ceiling by October 17 so it can continue to borrow money to fund its operations and pay interest on vast government securities held by China, Japan and other overseas investors.

Blanchard said the government shutdown, if it does not last too long, is likely to have a limited effect on the world economy, but that a U.S. debt default could be calamitous.

"Failure to lift the debt ceiling would, however, be a major event. Prolonged failure would lead to an extreme fiscal consolidation and almost surely derail the U.S. recovery. But the effect of any failure to repay the debt would be felt right away, leading to potential major disruptions in financial markets, both in the United States and abroad," Blanchard stated.

The IMF forecast 7.3 percent growth next year in China, the world's second largest economy after the U.S., down from a 7.6 percent advance this year. It sees growth expanding by 5.1 percent in India, an improvement over this year, but still lower than predicted. The IMF said Brazil's growth would be steady at 2.5 percent this year and next.

At the same time, the IMF said that the American economy would grow a meager 1.6 percent this year and advance by 2.6 percent in 2014, with both forecasts down from July forecasts.

The IMF said the economy in the 17-nation Eurozone would fall four-tenths of a percent this year and grow 1 percent in 2014. Collectively, the eurozone has a larger economy than the U.S. and is an important trading partner throughout the world, but debt-ridden economies on its western and southern flanks led to an 18-month recession.

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