IMF downgrades growth in global economy; urges farsighted planning

TOKYO—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 while the economic malaise is spreading to more dynamic emerging economies such as China, the international lending organization says in a quarterly update of its World Economic Outlook.

The IMF forecasts that the world economy will expand 3.3 per cent this year, down from its estimate of 3.5 per cent growth issued in July.

Its forecast for growth in 2013 is 3.6 per cent, down from 3.9 per cent three months ago and 4.1 per cent in April.

The IMF projected growth in Canada this year of 1.9 per cent, improving slightly to two per cent in 2013.

That compared with the July forecast that saw growth at 2.1 per cent for 2012 and 2.2 per cent for 2013.

The IMF said growth in Canada has been constrained by the sluggish U.S. economy.

“Domestic demand—both business investment and private consumption—has been supported by exceptionally favourable financing conditions, including low interest rates and credit availability,” the IMF said.

“These factors, along with the commodity boom, have also boosted the housing sector, especially in provinces with strong mining activity.”

However, the IMF warned about the amount of borrowing in Canada.

“In addition, an important domestic vulnerability in Canada relates to the housing market. A sharp or sustained decline in house prices could seriously set back the leveraged household sector and domestic demand,” the IMF said.

Among the 17 countries 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 per cent in 2012, the IMF said.

It forecasts growth in the euro area will stay flat in the first half of 2013 and tick up to about one per cent in the second half of the year.

Underpinning even the new, bleaker scenarios are assumptions that Europe will continue to ease monetary policy and that the U.S. 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 doesn’t deal with its budget crisis soon, the IMF 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 per cent this year from 5.8 per cent last year and 12.6 per cent in 2010.

—With files from The Canadian Press