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IMF forecasts bleak global growth in '13

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, the international lending organization said in a quarterly update of its World Economic Outlook, and the malaise is spreading to more dynamic emerging economies such as China.

The IMF forecasts that the world economy will expand 3.3 percent this year, down from the estimate of 3.5 percent growth it issued in July. Its forecast for growth in 2013 is 3.6 percent, down from 3.9 percent three months ago and 4.1 percent in April.

Underpinning that bleaker scenario are the 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.

“Downside risks have increased and are considerable,” the fund said. It said its forecasts are based “on critical policy action in the euro area and the United States, and it is very difficult to estimate the probability that this action will materialize.”

The IMF has urged the U.S. to raise the ceiling on the level of debt the government can issue, which is capped by law. In August 2011, a battle between the Obama administration and Congress over raising the limit wasn't resolved until the U.S. almost defaulted on its debt.

Global efforts to ease credit and increase the amount of money available for lending are helping, but appear to be yielding diminishing returns, as are fiscal stimulus policies, the IMF warned.

“Because uncertainty is high, confidence is low, and financial sectors are weak, the significant fiscal achievements have been accompanied by disappointing growth or recessions,” it said.

Policy Recommendations

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 percent this year from 5.8 percent last year and 12.6 percent in 2010.

“Low growth and uncertainty in advanced economies are affecting emerging market and developing economies through both trade and financial channels, adding to homegrown weaknesses,” the IMF's chief economist, Olivier Blanchard, said in a statement.

Still, the IMF raised the U.S. growth forecast slightly, to 2.2 percent this year from 2 percent in July. For 2013, though, it expects U.S. growth of 2.1 percent, down from 2.3 percent.

Among the 17 nations 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 percent in 2012, the IMF said.

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