IMF cuts 2013 global outlook as Europe urged to boost demand

The International Monetary Fund cut its global growth forecast and urged European policy makers to use “aggressive” monetary policy as a second year of contraction leaves the euro area’s recovery lagging behind the rest of the world.

The global economy will expand 3.3% this year, less than the 3.5% forecast in January, after 3.2% growth in 2012, the Washington-based fund said today, cutting its prediction for this year a fourth consecutive time. The Washington-based IMF sees the 17-country euro area shrinking 0.3%, compared with a 0.2% retreat in January, with France joining Spain and Italy in contracting.

“The main challenge is still very much in Europe,” IMF Chief Economist Olivier Blanchard said in a recorded statement released with the fund’s World Economic Outlook. “Europe should do everything it can to strengthen private demand. What this means is aggressive monetary policy and what this means is getting the financial system to be stronger -- it’s still not in great shape.”

As central banks in U.S. and Japan deploy unconventional policies such as asset purchases to rouse demand, pressure is mounting on the European Central Bank to do more. The IMF report describes a “three-speed” recovery led by emerging markets including China, with the U.S. forging ahead and Europe trailing after fighting a debt crisis that has forced bailouts of five countries in the region.

Recession Chance

While a 50% chance of a recession in the euro region is the most immediate threat to global growth, failure to devise debt reduction plans in the U.S. and Japan over the medium term would also have consequences, according to the report.

Japan’s plans for fiscal stimulus and record monetary easing were reflected in the fund’s new forecasts for the world’s third-largest economy, which were raised to 1.6% this year from 1.2% and 1.4% in 2014 from 0.7%.

The U.S. growth projection was trimmed to 1.9%, from 2% in January to incorporate the expected impact of across-the-board spending cuts known as sequestration.

Still, a recovering housing market, improving confidence and the Federal Reserve’s accommodative monetary policy will help growth accelerate to 3% in 2014, the fund said.

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