IMF to cut growth forecast amid Italy spending cuts

The International Monetary Fund is cutting its global growth forecast from the figure given in April, despite efforts by world leaders to break the deadlock on how to tackle the eurozone debt crisis.

by Michael Northcott
Last Updated: 19 Aug 2013

As the world trudges on through the mire of economic circumstance, it is hard to see how the PIIGS countries will ever get out of their bind. And if the words of IMF chief Christine Lagarde are anything to go by, then the situation is not getting any better. The 3.5% global growth figure that was predicted in April is higher than the likely reality, she announced today.

Lagarde did praise the 'significant steps' taken by eurozone leaders in her speech to an economic symposium in Tokyo, but said 'more needs to be done in order to complete the reform.' The announcement comes just as Italy's government agreed to cut public spending by £21bn over the next three years. Seeing as economists are concerned that Italy will be next to get in a flap about bailouts, this is good news, but means yet more pain for the people in the Mediterranean region as it will also mean a 10% contraction in the public sector.

Meanwhile, as the UK economy struggles against European financial headwinds, the Bank of England announced yesterday that it will use quantitative easing to pump an extra £50bn into the UK economy over the next four months. The measure is controversial because it is essentially the same as printing money and is inflationary, but the Bank says the economy has 'barely grown' for the last 18 months. Thankfully, inflation is currently low, around 2.8% (compared with 5.2% this time last year) and so are interest rates of 0.5%.

The problem with QE is that no-one is sure whether it works or not. The suspicion for many is that the banks simple keep the money rather than putting it to work in the 'real' economy. Still Merv obviously thinks that its worth another shot...

Finally, to top off the pile of new economic worries emerging today, the FTSE 100 stock market fell this morning ahead of the announcement of US jobs data. The results have not yet been published, but investors are worried that with last month's dip in US manufacturing, the jobs data will not be much better. Even on the flip side, if the results are good, investors are worried that this will lower the chance of more policy action to set the economy on an even keel. Swings and roundabouts on this one, folks.

All in all, the global economy does not appear to be staring into an abyss in the way it was a few weeks ago, but profound uncertainty lingers and there is still no knowing when a marked improvement will come. Better just enjoy the weather then! Oh no...it's raining.

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