IMF cuts 2013 global outlook as Europe urged to boost demand

2014 Forecast

The forecast for global growth next year is 4%, compared with 4.1% in the IMF’s January projections.

In the report, the fund said advanced economies had defused the two biggest threats to the global recovery -- a splintering of the euro region and the so-called U.S. fiscal cliff.

The Standard & Poor’s 500 Index jumped 10% from January through March, its biggest quarterly advance in a year, and closed at all-time highs twice last week. Japan’s Nikkei 225 surged 19.3%, its largest quarterly gain since mid-2009. The Euro Stoxx 50 Index, a measure of shares in nations using the common currency, dropped 0.5% in the three months through March.

“There appears to be a growing bifurcation between the United States on one hand and the euro area on the other,” Blanchard wrote in a foreword to the report. “Given the strong interconnections between countries, an uneven recovery is also a dangerous one.”

The euro region is still facing a contraction of credit as banks fail to translate low interest rates of the European Central Bank into affordable credit for companies and households.

Wheels ‘Spinning’

“Because of insufficient financial repair, monetary policy is ‘spinning its wheels,’” IMF Managing Director Christine Lagarde said in a speech last week. “The priority must be to continue to clean up the banking system by recapitalizing, restructuring, or -- where necessary -- shutting down banks.”

The fund sees a contraction deepening in Italy to 1.5% from 1% in January and in Spain to 1.6% from 1.5%. France’s gross domestic product this year will shrink 0.1%, instead of growing 0.3% as predicted three months ago, the IMF report said.

The IMF said the ECB has room to cut interest rates further and suggested that the central bank’s bond-purchase program, which must be requested and has never been used, “be made available to countries with programs that are delivering on adjustment.”

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