IMF cuts forecast on second year of Europe contraction

Economic Contraction

The forecast for a second year of economic contraction reflects “delays in the transmission of lower sovereign spreads and improved bank liquidity to private sector borrowing conditions,” as uncertainty remains over ending the turmoil that has engulfed nations from Ireland to Cyprus, according to the report.

The fund expects the region’s outlook to improve, forecasting a return to 1% growth in 2014. It sees the world economy expanding 4.1% next year, 0.1 percentage point less than in October.

In the U.S., “underlying economic conditions remain on track,” the IMF said as it cut its forecast for the world’s largest economy to 2% from 2.1% in 2013 and raised it 0.1 percentage point to 3% next year.

The priority is for Congress to avoid too much deficit reduction too soon, reach an agreement between Republicans and Democrats to raise the debt ceiling and craft a plan to reduce debt over the medium term, according to the report.

Japan Forecast

While the forecast for Japan was left unchanged at 1.2% this year amid fiscal and monetary plans to stimulate its economy, the fund cut the 2014 prediction by 0.4 percentage point to 0.7%.

Fiscal expansion is “going to help growth in the short run, no question,” Blanchard said. At the same time “when you start with such a level of debt and without a medium term credible fiscal consolidation plan, increasing the fiscal deficit in the short run is a very risky thing to do.”

Commodities exporters will feel the pinch of falling prices, with oil now seen slipping 5.1% instead of 1%, according to the report. While supportive policies have help buoy growth in some emerging market countries in recent months, there’s less space for such action now, it said.

Growth forecasts for Brazil were cut to 3.5% this year from 4% and to 4% from 4.2% in 2014. India was lowered 0.1 percentage point to 5.9% this year and was left unchanged at 6.4% in 2014.

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