The world economy has entered a “dangerous new phase” of declining growth that will require policymakers to take action, the chief economist of the International Monetary Fund (IMF) warned Tuesday.
“Global activity has weakened and become more uneven, confidence has fallen sharply recently, and downside risks are growing,” said in the report, which was released prior to the IMF’s annual meetings this week.
In its “World Economic Outlook,” the IMF steeply downgraded projections it made in June regarding the U.S. economy. The international lending organization had predicted a growth of 2.5 percent in 2011 and 2.7 percent in 2012. In just three months, the forecast has changed to 1.5 percent in 2011 and 1.8 percent in 2012.
Even to meet those levels of growth, the U.S. economy would need to expand at a much faster rate in the second half of this year than the 0.7 percent rate of the first six months.
“The global economy has entered a dangerous new phase,” said Olivier Blanchard, the IMF’s chief economist. “The recovery has weakened considerably. Strong policies are needed to improve the outlook and reduce the risks.”
The U.S. faces longer-lasting problems that go beyond skyrocketing gas prices and effects caused by the earthquake and tsunami in Japan, the IMF said. Employers aren’t hiring or raising pay. Many homeowners owe more on their mortgages than their properties are worth. All these trends are holding back consumer spending and are reasons why “growth will be modest relative to historical averages for years to come.”
“The IMF news is sobering but not surprising. There seem to be real head winds to growth in the global economy, certainly more than expected earlier in the year,” Scott Graham, head of government bond trading at Bank of Montreal’s BMO Capital Markets unit in Chicago, told the San Francisco Chronicle.
According to the report, unemployment is likely to average 9 percent next year. This forecast echoes a recent statement released by the Obama administration.
The IMF praised President Obama’s proposal to cut taxes and spend more on infrastructure to provide a short-term stimulus. However, these efforts need to be paired with a longer-term plan to reduce the deficit, the report said.
Budget cuts “cannot be too fast or it will kill growth,” Mr. Blanchard said. “It cannot be too slow or it will kill credibility.”
Mr. Obama on Monday proposed more than $3 trillion in tax increases and spending cuts over 10 years. His proposal will be considered by a congressional panel charged with finding $1.5 trillion in deficit reductions.
The president’s jobs and tax proposals face stiff opposition from congressional Republicans.