The International Monetary Fund released its latest global economic forecast Friday, cataloging risks that have piled up in the world economy over just the past two months.
The IMF says it still expects global growth of 4.3% this year, down slightly from the 4.4% estimate offered in April in what it called a “mild slowdown of the global expansion.” Among advanced economies, the U.S. is seen growing at 2.5% (slower than the prior 2.8% estimate) while Japan is expected to contract 0.7% (instead of 1.4% growth).
In the update to the World Economic Outlook, the IMF’s economists said greater-than-expected weakness in U.S. activity and renewed financial volatility from the euro zone’s fiscal troubles “pose greater downside risks” to the world economy. They also cited more risks from “persistent fiscal and financial sector imbalances in many advanced economies” along with signs of overheating in emerging and developing economies, which are maintaining their strong growth prospects.
“Strong adjustments — credible and balanced fiscal consolidation and financial sector repair and reform in many advanced economies, and prompter macroeconomic policy tightening and demand rebalancing in many emerging and developing economies — are critical for securing growth and job creation over the medium term,” the fund said.
That’s not all. In its latest update for its Global Financial Stability Report, the fund said financial risks have risen worldwide for three (somewhat similar) reasons:
* While a multispeed global recovery remains the base case, downside risks to this baseline have increased.
* Concern about debt sustainability and support for adjustment efforts in Europe’s periphery is leading to market pressures and worries about potential contagion. Political risks are also raising questions about medium term fiscal adjustment in a few advanced countries, notably, the United States and Japan.
* Notwithstanding some recent pullback in risk appetite, the prolonged period of low interest rates may push investors into riskier assets in a “search for yield.” This trend has the potential to build financial imbalances for the future, particularly in some emerging markets.
The IMF said policymakers need to accelerate actions to address the long-standing risks, warning that “the room for maneuver to counter shocks has been reduced.”
“Although there has been progress, improvements in financial system robustness have been insufficient so far,” the update said. “Markets may lose patience and become disorderly if political developments derail momentum on fiscal consolidation and financial repair and reform.”
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