Doom and gloom from IMF as it cuts forecasts

The UK has a 17% chance of slipping back into recession, according to the eggheads at the IMF. The answer, apparently, lies in switching back on those printing presses.

by Emma Haslett
Last Updated: 06 Nov 2012
Well. If you ever need cheering up, don’t turn to the International Monetary Fund. The world’s economic watchdog has just published what will surely go down in history as the most pessimistic forecast for a long, long time. The IMF’s bi-annual report on the outlook for the world economy said high oil prices, weaker-than-expected growth in the US, Europe’s sovereign debt problems and the Japanese tsunami have combined to create what could become a ‘lost decade’. As a consequence, it revised down its growth figures: prospects for global growth have fallen from 4.5% to 4%, US growth has dropped by 1% to 1.5% and the UK’s growth prospects have been downgraded sharply, from 1.5% to just 1.1% for this year - and from 2.3% to 1.6% in 2012. And that’s in its best-case scenario...

Yep: it depends, says the IMF, on whether the Greeks succumbing to no more than the ‘partial default’ it’s already agreed (or in the process of agreeing) with its creditors (which, to be fair, is fairlly likely - more on that in a minute) and on Obama’s $447bn jobs package being agreed upon. If that doesn’t happen, chances are the US and the eurozone would both fall back into recession, with 2012 output dropping more than 3% below forecasts. And although the UK’s financial woes are minor compared with the eurozone and the US, we wouldn’t be immune - after all, those areas are among our largest trading partners. In fact, the IMF estimates that the UK has a 17% chance of slipping back into recession, while France has an 18% chance and the US has a 38% chance.

But never fear: it has suggestions for ways to get the world economy back on top. The answer, says the IMF, is to find a balance between austerity measures and growth. Instead of resorting to extreme cost-cutting, leaders much be ready to inject capital back into their economies and to ‘restructure weak but viable banks while closing others’. In other words, it may be time to turn on those printing presses again. Even in the UK, George Osborne’s £110bn austerity plan might have been a bit much: if growth turns out to be ‘substantially less’ than the 1.1% it expects this year, the UK should consider delaying spending cuts. Although we’re not sure Osborne et al will be entirely convinced by that...

Good news, then, that talks over another Greek bailout seem to be going swimmingly. According to the European Commission, a member of the ‘troika’ of inspectors trying to agree on austerity measures Greece needs to implement for it qualify for another €8bn (£6.9bn) tranche of aid, ‘good progress was made’ during a second day of talks. All very encouraging - particularly given the urgency with which Greece needs that bailout (apparently there are only a few days before it’ll be forced to stop paying wages). But, as we pointed out yesterday, whether this halts Greece’s troubles or simply puts off the IMF’s worst-case scenario for another few months, still isn’t clear.

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