Europe weighing on global growth - IMF

Updated: Wednesday, 23 Jan 2013 15:03

An unexpectedly stubborn euro zone recession and weakness in Japan will weigh on global economic growth this year, the IMF warned today.

However, a rebound in 2014 should deliver the fastest expansion since 2010, the International Monetary Fund said.

The IMF trimmed its 2013 forecast for global growth to 3.5% from the 3.6% it projected in October.

But it said it looked for a 4.1% expansion in 2014 if a recovery takes a firm hold in the euro zone.

The IMF said the world economy grew 3.2% last year. Healthy global growth rates of above of above 4% were last seen in 2010, when output expanded 5.1% as the global financial crisis eased.

The IMF today downgraded its forecast for the euro zone, projecting a slight economic contraction for 2013.

It said that despite positive policy steps to tackle the debt crisis in some euro zone countries, continued uncertainty about how the crisis would be resolved is weighing down growth prospects.

A prolonged stagnation in the euro zone is a threat especially if the currency bloc fails to complete fiscal and banking reforms, it added.

Meanwhile, activity in advanced economies would likely remain weak this year with growth of just 1.4% before strengthening to 2.2% in 2014, the IMF said. In October, it projected developed economies would expand 1.5% in 2013.

''Policy actions have lowered acute risks in the euro area and the US," the IMF said in an update of its World Economic Outlook.

"However, downside risks remain significant, including renewed setbacks in the euro area and risks of excessive near-term fiscal consolidation in the US," it added.

The IMF said the US economy was set to expand 2% this year, with growth rising above trend in the second half of this year and reaching 3% in 2014.

"The priority is to avoid excessive fiscal consolidation in the short term, promptly raising the debt ceiling, and agree on a credible medium-term fiscal consolidation plan, focused on entitlement and tax reform," it said.

On Japan, the IMF said its economy is likely to manage 1.2% growth this year, helped by fiscal stimulus, an easing of monetary policy and a weaker yen. But it warned that growth was likely to slow to 0.7% in 2014. It urged Tokyo to adopt a more ambitious easing of monetary policy and a "credible" medium-term plan to tighten its budget.

Meanwhile, growth in emerging and developing economies should strengthen to 5.5% this year and 5.9% in 2014, the IMF said, adding that supportive policies had helped boost growth although weak demand from trading partners would still be a problem.

The pace of growth in China was set to increase to 8.2% this year and 8.5% in 2014, up from 2012 but still lower than the 10% growth rates of 2010, the fund said. Developing Asia, including China and India, will remain the fastest-growing region in the world, according to IMF forecast, with growth of 7.1% this year and 7.5% in 2014. Africa, with growth likely around 5.8% this year and 5.7% next year, is the world's second-fastest growing.