IMF lowers global growth outlook

In its World Economic Outlook, the IMF claims that the global economic slowdown is getting worse. The organization also cut growth forecasts for the second time since last April.

The IMF report was issued ahead of its twice-yearly meeting. The meeting will be held in Tokyo later in the week. The IMF also warned that if the U.S. and Europe did not remedy their economic ills, this would prolong the slump. The U.S.will certainly not act until after the November election when the government will need to face the fiscal cliff. The fiscal cliff in the U.S. and the European debt crisis were flagged by the IMF as key issues that will impact the global economy.

Global growth, the report said, is too weak to bring down unemployment. What momentum exists comes mainly from central banks. No doubt this news will be greeted with great scepticism by U.S. Republicans, who blame Obama for high unemployment, and claim that the government cannot promote growth, only the private sector.

The report says:

"A key issue is whether the global economy is just hitting another bout of turbulence in what was always expected to be a slow and bumpy recovery or whether the current slowdown has a more lasting component.The answer depends on whether European and U.S. policymakers deal proactively with their major short-term economic challenges."

The U.S. Treasury Secretary, Timothy Geithner, said that reforms in Europe "could take years to bear fruit". These reforms negatively impact pension benefits, wages, and the power of working people, and in the short term cause recessions. In the longer term, investors hope conditions emerge that are favorable for profitable investment again as labor costs are lowered and people's expectations are lowered as well.

Geithner told a meeting of business leaders:

"In these periods of time, where people were very worried about the risk of collapse in Europe, you saw an impact on financial markets and confidence that was very, very substantial. Europe still has a very hard road ahead of them."

Last week, Jim Flaherty, the Canadian Finance MInister had also warned that the European debt crisis was "a clear and present danger.

The IMF lowered its estimate of global growth for 2012 from 3.5% in July to 3.3% now. This will mark the slowest rate of growth since 2009 when the world was just beginning to recover from the financial crisis. The prediction for next year was also lowered from 3.9% in July to 3.6%.

U.S. growth was predicted to be slighly more than 2% both this year and next a much better performance than the euro area that was predicted to contract by .4% this year and grow only .2% next year.

The prospects for emerging markets are still relatively positive, although some are predicted to grow more slowly than predicted earlier. Estimates for India and Brazil are lowered considerably. Expectations were also cut for Chinese growth in 2012 and 2013. But chief IMF economist Olivier Blanchard warned about being overly pessimistic. He did not expect a hard landing in China, India, or Brazil, merely slowing growth. The future of the global economy remains murky, Beyond the fiscal cliff there seem to be other factors working against the expansion of global capital.

In China, Japanese businesses are feeling the effect of a strong nationalist reaction against Japanese claims to a few islands. In the U.S. congressional panels are raising security issues against Chinese telecom companies. These are all new factors that will impact international trade negatively. When times are tough, nationalist fervour is often the reaction and politicians take advantage of the situation to harvest votes.