The IMF cut its global growth forecast Tuesday morning for the second time since April and warned U.S. and European policy makers that failure to fix their economic ills would prolong the slump.
Global growth is too weak to bring down unemployment, and what little momentum can be found is coming primarily from central banks, the International Monetary Fund said in its World Economic Outlook, released ahead of its twice-yearly meeting, which will be held in Tokyo later this week.
"A key issue is whether the global economy is just hitting another bout of turbulence in what was always expected to be a slow and bumpy recovery or whether the current slowdown has a more lasting component," it said.
"The answer depends on whether European and U.S. policy makers deal proactively with their major short-term economic challenges."
“Confidence in the global financial system remains exceptionally fragile,” the IMF said. “Bank lending has remained sluggish across advanced economies” and increased risk aversion has dampened capital flows to emerging markets, it said.
For 2012, the IMF now expects global output to grow just 3.3 percent, down from its July estimate of 3.5 percent, making it the slowest year of growth since 2009. It predicted only a modest pickup next year, to 3.6 percent, which is below its July estimate of 3.9 percent.
Emerging markets are still expected to grow four times as fast as advanced economies, but the IMF sharply cut back its estimates for India and Brazil, with the latter now seen growing slower than the United States this year.
The report called for U.S. policy makers to find an alternative to planned automatic tax increases and spending cuts -- the dreaded so-called “fiscal cliff” -- that would likely trigger a recession, Bloomberg reported. Europeans must follow on their commitments for a more integrated monetary union, and many emerging markets can afford to cut interest rates or pause tightening to fight off risks to their economies, the IMF said.
The report predicts that the 17-country euro zone economy will contract 0.4 percent this year, 0.1 percentage points worse than forecast in July, and that it will grow 0.2 percent in 2013, less than the 0.7 percent predicted three months ago.
The U.S. is seen expanding 2.2 percent this year, higher than an earlier forecast, and growing 2.1 percent next year, less than previously predicted. Japan’s estimate was cut to 2.2 percent this year and to 1.2 percent in 2013.
Spain’s economy will shrink 1.3 percent next year, 0.7 percentage points worse than predicted in July. German growth is seen at 0.9 percent each year, with the 2013 estimate half a percentage point less than previously forecast.
The IMF said "familiar" forces were dragging down advanced economies' growth: fiscal consolidation and a still-weak financial system, the same problems that have plagued the world since the global financial crisis exploded in 2008.
"More seems to be at work, however, than these mechanical forces -- namely, a general feeling of uncertainty," IMF Chief Economist Olivier Blanchard said.
Measures of risk and uncertainty, such as the VIX volatility gauge in the United States, remain at low levels, Blanchard pointed out, which makes it difficult to assess the nature of the uncertainty. Blanchard described it as "more Knightian in nature," referring to a term for risk that is impossible to measure, named after economist Frank Knight.
"Worries about the ability of European policy makers to control the euro crisis and worries about the failure to date of U.S. policymakers to agree on a fiscal plan surely play an important role, but one that is hard to nail down," Blanchard said.
"If uncertainty is indeed behind the current slowdown, and if the adoption and implementation of these measures decrease uncertainty, things may turn out better than our forecasts, not only in Europe, but also for the rest of the world," Blanchard said. "I, for once, would be happy if our baseline forecasts turn out to be inaccurate -- in this case, too pessimistic."