SINGAPORE (MNI) – The global economy has deteriorated further since
the last International Monetary Fund quarterly forecasts in July and it
is unclear whether the current slowturn is a bump in the road to
recovery or signals that the global economy is headed for a longer-term
contraction.

“The answer depends on whether European and U.S. policymakers deal
proactively with their major short-term economic challenges,” the IMF
said in the latest World Economic Outlook report released Tuesday that
downgraded economic predictions virtually across the board.

Those downgrades come even though the report assumes that U.S. and
European leaders follow through on the action needed. “If they do not,
the forecast will likely be disappointed once again.”

The IMF downgraded its global growth estimate for this year by 0.2
percentage point to 3.3% from its July estimates and lowered its
forecast for growth in 2013 to 3.6% from 3.9% in July.

“Looking ahead, no significant improvement appears in the offing,”
it said in the report.

The U.S. growth estimate for this year was raised 0.1 percentage
point to 2.2%, but lowered by the same amount for 2013 to 2.1%.

Growth estimates for the euro area were cut 0.1 percentage point
this year to -0.4% and for next year by 0.5 point to a mere +0.2%.

However, growth could “deteriorate very sharply” if two main
assumptions do not materialize, the IMF said.

The first is that European policymakers take more action to adjust
economies at the national level while further integrating the euro area,
including the establishment of a single banking supervisory mechanism.

The second assumption is that the U.S., once the presidential
election is over, policymakers successfully avoid the fiscal cliff and
make progress on plans to return the U.S. to fiscal sustainability.

“The recovery is forecast to limp along in the major advanced
economies, with growth remaining at a fairly healthy level in many
emerging market and developing economies,” the report noted. “Leading
indicators do not point to a significant acceleration of activity, but
financial conditions have recently improved in response to euro area
policymakers’ actions and easing by the Federal Reserve.”

Growth in Asia will continue to ease on the heels of a slowdown in
China, the IMF said, and Japan’s economy is likely to slow sharply as
the effects of rebuilding of earthquake-damaged areas wear off.

The problem of high government debt in many countries existed
before the financial crisis but the need to address it has been brought
forward from the long- to the medium-term by the vulnerabilities exposed
by the crisis, the IMF said.

“Important questions remain about how the global economy will
operate in a world of high government debt and whether emerging market
economies can maintain their strong expansion while shifting further
from external to domestic sources of growth,” the IMF said.

The companion Global Financial Stability Report noted that the
global financial system is more vulnerable than it was in the spring,
despite a general market rally over the summer.

“Confidence in the global financial system remains exceptionally
fragile,” it said.

“Financial conditions are likely to remain very fragile over the
near term because implementing a solution to the euro area crisis will
take time and the U.S. debt ceiling and fiscal cliff raise concerns
about the U.S. recovery.”

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