IMF Lowers Global Economic Outlook for 2012

The International Monetary Fund warned on Tuesday that the ongoing European debt crisis is casting a shadow on the economic outlook for most of the world, causing the IMF to lower its growth forecasts for all but one country: the United States.

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The IMF now expects the global economy to grow 3.3 percent in 2012, according to an update to its World Economic Outlook, down from a 4 percent September projection.

But despite the weaker global outlook, and a European downturn that will likely see many euro states falling back into recession, the United States was the one country that did not have its forecast lowered by the IMF, which still expects activity in the U.S. to expand 1.8 percent in 2012.

The intensification of the debt crisis in Europe is what led the IMF to downwardly revise its global growth forecast. The 17-nation euro economy is expected to shrink 0.5 percent this year, down sharply from a projected growth rate of 1.1 percent in September.

The slowdown in the euro zone is “due to the rise in sovereign yields, the effects of bank deleveraging on the real economy, and the impact of additional fiscal consolidation announced by euro area governments,” the IMF said.

Italy and Spain are among the nations facing higher borrowing costs and overweight budgets; both are expected to be in recession over the next two years. Germany and France, the two largest economies in the euro zone, are both expected to grow less than 0.5 percent in 2012, though activity is expected to pick up in 2013.

The debt crisis and banking problems in the euro zone are posing increased risks to the global financial system, according to an update to the IMF’s Global Financial Stability Report, which said more needs to be done to stabilize public finances and prevent a deeper credit freeze in the banking sector.

However, while advocating the European Central Bank’s recent actions, the report notes that longer-term interest rates remain high for many governments, and that banks are still having trouble obtaining funding.

The IMF also stressed that governments should not cut back on spending too quickly, as it could make the recession worse, and that bank “deleveraging” should not impact the flow of credit to businesses and consumers.

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