IMF predicts slower economic growth for world, US

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Associated Press

Posted on July 16, 2012 at 9:02 AM

Updated Monday, Jul 16 at 10:33 AM

WASHINGTON (AP) — An international lending organization has slightly lowered its outlook for global growth over the next two years.

The International Monetary Fund also warned that Europe's financial crisis and a potential budget crisis in the United States could slow world economic growth even further.

The world economy will likely expand 3.5 percent this year, the IMF said in a quarterly update to its World Economic Outlook. That's down slightly from its previous estimate of 3.6 percent in April.

The IMF also cut its forecast for global growth to 3.9 percent in 2013, from 4.1 percent three months ago.

And it shaved its U.S. growth forecast to 2 percent this year from 2.1 percent in April. For 2013, it expects U.S. growth of 2.3 percent, down from 2.4 percent.

The IMF also warned that the United States could fall back into a recession next year if Congress doesn't deal with a pending fiscal crisis.

Several large tax cuts are set to expire at the end of the year and big spending cuts are scheduled to kick in at the same time. Those changes, known as the "fiscal cliff," could cause the U.S. economy to "stall" next year, the report said.

Olivier Blanchard, the IMF's chief economist, said failure to deal with these issues could cut up to 4 percentage points off U.S. growth in 2013. It would also reduce growth in other advanced economies — principally Europe, Canada and Japan — by 1.5 percentage points.

"We are talking about, potentially, an enormous shock," Blanchard said. "If it were to happen, it would be a major, major event."

Blanchard noted that Europe's leaders must follow through on the promises that were made at a leaders' summit at the end of last month. At that time, the 17 nations that use the euro agreed to centralize the regulation of European banks and to expand the use of the region's bailout funds.

European leaders need to ensure that borrowing costs for Spain and Italy don't get so high that they are unable to borrow from private lenders, possibly necessitating another bailout.

"The implications of such an event could easily derail the world recovery," Blanchard said.

The IMF had previously warned that the U.S. economy could face another recession if the tax increases and spending cuts kick in.

The U.S. should also raise its borrowing limit, the report said. The level of debt the government can issue is capped by law. Last August, a battle between the Obama administration and Congress over raising the limit wasn't resolved until the U.S. almost defaulted on its debt.

IMF Managing Director Christine Lagarde warned in early July about the consequences if the U.S. failed to raise the debt limit and avoid the fiscal cliff. She said they "would be severe with negative spillovers to the rest of the world."

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