On Tuesday, the International Monetary Fund said that it predicts slowing global economic growth and a rising risk of global economic calamity if governments fail to act appropriately.
Last fall, the IMF predicted that the global economy would expand by a paltry 4 percent, but has since downgraded its expectations to 3.25 percent global economic growth in 2012.
The economy that makes up the largest chunk of the projected growth is China (the world’s most rapidly expanding economy), which is expected to enjoy 8.2 percent growth over the next year. In comparison, the United States, which owes trillions of dollars to the Chinese, is expected to experience only 1.8 percent economic growth in 2012.
The IMF says that the slowed global economic growth falls heavily on the economic disaster unfolding in eurozone countries, where a “mild recession” is expected to take hold.
“The global recovery is threatened by intensifying strains in the euro area and fragilities elsewhere. Financial conditions have deteriorated, growth prospects have dimmed, and downside risks have escalated,” says a portion of the IMF’s World Economic Outlook Update.
The IMF calls for a series of “decisive and consistent” global policy actions, including:
- Fiscal adjustment. In the near term, sufficient fiscal adjustment is in motion in most advanced economies. Countries should let automatic stabilizers operate freely for as long as they can readily finance higher deficits.
- Liquidity. While fiscal consolidation proceeds in the advanced economies, monetary policy should continue to support growth, as long as inflation expectations remain anchored and unemployment stays high.
- Bank deleveraging. To break the adverse loops between weak growth and deteriorating bank balance sheets, more capital needs to be injected into the euro area banks (including from public sources) and supervisors must do whatever possible to avoid excessively fast deleveraging that could lead to a devastating credit crunch.
- Financial adjustment. Easy funding in the short-term must be coupled with continued progress to repair and reform financial systems. This is a critical element of normalizing credit conditions and would help reduce the burden on monetary and fiscal policy of supporting the recovery.