IMF cuts global outlook while warning of U.S. default threat

The International Monetary Fund cut its global outlook for this year and next as capital outflows further weaken emerging markets and warned that a U.S. government default could “seriously damage” the world economy.

Growth worldwide will be 2.9% this year and 3.6% next year, the IMF said in a report released today in Washington, compared with July predictions of 3.1% for 2013 and 3.8% for 2014. It sees emerging economies growing 4.5% this year, 0.5 percentage point less than three months ago, as projections were reduced for China, Mexico, India and Russia.

“Advanced economies are gradually strengthening” while “growth in emerging-market economies has slowed,” IMF chief economist Olivier Blanchard wrote in a foreword to the World Economic Outlook report. “This confluence is leading to tensions, with emerging-market economies facing the dual challenges of slowing growth and tighter global financial conditions.”

The IMF’s forecasts factor in a short U.S. government shutdown and an agreement on the nation’s debt-limit before an Oct. 17 deadline. A stalemate that causes a default “could seriously damage the global economy,” the fund said.

Political Gridlock

President Barack Obama reiterated yesterday that he won’t negotiate with Republicans over the partial shutdown and the U.S. debt limit as Senate Democrats began preparing for a test vote on a clean debt-ceiling bill. Many U.S. government services have been shuttered for more than a week and the country is nine days away from running out of its ability to stay under a $16.7 trillion cap on borrowing.

“The effects of any failure to repay the debt would be felt right away, leading to potentially major disruptions in financial markets, both in the U.S. and abroad,” Blanchard said during a press conference. “We see this as a tail risk, with low probability, but, were it to happen, it would have major consequences.”

Responding to questions from reporters about the U.S. economy, he said, “if there was a problem lifting the debt ceiling, it could well be that what is now a recovery would turn into a recession, or even worse.”

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