The International Monetary Fund cut its forecast for U.S. economic growth on Friday and warned Washington and debt-ridden European countries that they are playing with fire unless they take immediate steps to reduce their budget deficits.
The IMF, in its regular assessment of global economic prospects, said bigger threats to growth had emerged since its previous report in April, citing the euro zone debt crisis and signs of overheating in emerging market economies.
The Washington-based global lender forecast that U.S. gross domestic product would grow a tepid 2.5 percent this year and 2.7 percent in 2012. In its forecast just two months ago, it had expected 2.8 percent and 2.9 percent growth, respectively.
With regard to the global economy overall, the IMF struck a measured tone, saying the slowdown of recent months should be temporary. It trimmed its forecast for global growth this year only slightly, to 4.3 percent from 4.4 percent, and maintained its estimate for robust Chinese growth of 9.6 percent despite recent signs of a slowdown there.
Yet that relatively benign global outlook could quickly fall apart if politicians in the United States and Europe do not start showing more leadership in addressing their countries' debt problems, the fund warned.
You cannot afford to have a world economy where these important decisions are postponed, because you're really playing with fire, said Jose Vinals, director of the IMF's monetary and capital markets department.
We have now entered very clearly into a new phase of the (global) crisis, which is, I would say, the political phase of the crisis, he said in an interview in Sao Paulo, where the updates to the IMF's World Economic Outlook and Global Financial Stability Report were published.
In the United States, the political problems include a fight over raising the legal ceiling on the nation's debt. A first-ever U.S. default would roil markets, and Fitch Ratings said even a technical default would jeopardize the country's AAA rating.
The IMF said the outlook for the U.S. budget deficit this year has improved somewhat due to higher-than-expected revenues. In a separate report, it forecast a deficit of 9.9 percent of GDP -- better than the deficit of 10.8 percent of GDP it foresaw in April, but still near historic highs.
MARKETS INCREASINGLY ON EDGE
The fund, which has endured its own political crisis due to the resignation of its chief, Dominique Strauss-Kahn, on sexual assault charges, said the global economy has gained ground despite a slowdown it deemed not reassuring.
It attributed the weakness to temporary disruptions such as the Japan earthquake, bad weather pressuring food crops and higher energy prices. Global growth should reaccelerate during the second half of the year, the report said.
The fund's forecast for global growth next year remained unchanged at 4.5 percent.
The IMF raised its growth view for the euro area in 2011 to 2.0 percent from 1.6 percent. For 2012, the IMF saw growth at 1.7 percent, little changed from its previous 1.8 percent.
Yet Europe also poses some of the biggest risks to the global economy, Vinals said.
If you make a list of the countries in the world that have the biggest homework in restoring their public finances to a reasonable situation in terms of debt levels, you find four countries: Greece, Ireland, Japan and the United States, Vinals said.
Greece has edged closer to default as euro zone officials disagree on a planned second aid package for the indebted country. With strikes and protests around the country, political turmoil has added to uncertainty, stoking fears that the government will not be able to tighten its belt enough to reduce crippling deficits.
Fears of contagion in the euro zone have driven global stock markets lower in recent sessions.
The fund raised its forecast for Germany, the powerhouse of the euro zone, to 3.2 percent from 2.5 percent, with growth moderating to 2 percent in 2012.
Forecasts for large emerging markets remained stable or slipped. While China's GDP view stayed unchanged, the IMF lowered its Brazil outlook to 4.1 percent from 4.5 percent.
Those countries, along with Russia, India and South Africa, make up the fast-growing BRICS, a group of emerging economies whose brisk expansion has outstripped that of developed markets recently.
Robust economic growth and rising inflation have caused emerging economies to tighten monetary policy with higher interest rates and reserve requirements, even as many developed nations keep policy ultra-loose to try to boost anemic growth.
The IMF warned that many emerging markets still need more tightening. In China, for example, the high inflation rate means negative real interest rates.
Some emerging markets have been reluctant to tighten too far, fearful of derailing growth or attracting speculative investment flows that could push their currencies ever higher.
(Editing by Brian Winter, Leslie Adler and Dan Grebler)