TIRANA, July 18 – The latest IMF World Economic Outlook projects that the global economy will grow 3.5 percent this year, down 0.1 percentage points from the April forecast, and 3.9 percent in 2013, 0.2 percentage points lower. An already sluggish global recovery shows signs of further weakness, mainly because of continuing financial problems in Europe and slower-than-expected growth in emerging economies, the IMF said in a regular update to its World Economic Outlook (WEO).
“More worrisome than these revisions to the baseline forecast is the increase in downside risks,” said Olivier Blanchard, the IMF chief economist and director of the IMF’s Research Department, which prepares the WEO.
The IMF said the most immediate risk to the global recovery is that delayed or insufficient policy action will further escalate the euro area crisis. “Simply put, the euro periphery countries have to succeed,” said Blanchard. The report cited agreements at the June 28 eurozone summit as a step in the right direction. It said the summit actions should help break the “adverse links between sovereigns and banks and create a banking union.” But the recent deterioration in sovereign debt markets demonstrates that timely implementation of these measures, together with further progress on banking and fiscal unions, must be a priority.
Financial risks on the rise
Risks to financial stability have risen since the April Global Financial Stability Report (GFSR), as the global recovery still struggles and fears about the quality of bank assets in Europe continue to roil financial markets, the IMF said in its latest update. Many of the same issues in Europe and the United States that the WEO identifies as threats to global growth, the GFSR says could threaten financial stability and erode financial markets’ confidence.
Emerging markets face challenges both at home and from abroad, the GFSR update said. On the domestic front, policymakers are confronted with slowing growth and the legacy of very rapid growth of credit that took place in the last few years. Many emerging markets also face volatile capital flows and concerns about rapid depreciation. Some countries still have room for monetary easing to respond to large adverse domestic or external shocks, while fiscal stimulus remains a second line of defense. The report warned that a large policy-induced credit stimulus could heighten asset quality concerns and potentially undermine GDP growth and financial stability in the years ahead.
