Phillip Inman in Tokyo
The Guardian
8 October 2012

World economic outlook warns of fresh downturn as European ministers asked to try and promote growth

The International Monetary Fund has urged Eurozone leaders to act swiftly in response to the debt crisis in Greece and Spain, or risk dragging down the global economy with another financial crisis.

The IMF warned that the situation was grave and could escalate into a wider downturn unless national leaders ended their disputes with a long-lasting deal. As eurozone finance ministers met in Luxembourg for crisis talks and the launch of the euro’s permanent rescue fund, the IMF urged Europe and the US to promote growth to help major developing economies like China, Brazil and India .

The Washington-based lender said at the start of its annual meeting, in Tokyo, that the “downside risks are judged to be more elevated than in the April 2012 or September 2011 world economic outlook reports”. The annual assessment of the global economic situation said it was not clear whether the situation was another bump in the road to recovery or a worsening of the situation. “The answer depends on whether European and US policymakers deal proactively with their major short term economic problems,” it said.

The warning comes against a backdrop of slowing GDP growth across developed countries and much of the developing world as trade dries up and governments increasingly hide behind protectionist barriers. Although Britain was singled out by the IMF as one of the developed nations expected to grow next year, chancellor George Osborne was forced to concede in his speech to the Conservative party conference on Monday that lack of growth in the past two years meant austerity measures could last until as long as 2018.

And the IMF admitted that it, like many other forecasting organisations, had underestimated the negative impact on growth of steep cuts in public spending. It said: “Staff research suggests that fiscal cutbacks had larger than expected negative short-term multiplier effects on output, which may explain some of the output falls.”

The World Bank, which is holding its annual meeting alongside the IMF in Tokyo, added to the gloom with a report that warned of a cuts in growth across the developing world. Stock markets tumbled as the prospects for growth were trimmed by the bank, which mainly lends to cash-strapped poorer countries.

The FTSE finished the day at 5845, down 26 points, while continental stock markets also fell. Figures showing German manufacturing has lost much of its vitality over the summer compounded gloomy assessments of the French economy to further depress markets. But eurozone ministers were adamant that Spain would not need a bailout and was capable of refinancing its banks and keeping within budget constraints without the need for a further EU funds.

The German finance minister, Wolfgang Schaeuble, said Madrid had made clear it wanted no help. “Spain needs no aid programme. Spain is doing everything necessary, in fiscal policy, in structural reforms,” he said as he arrived at the launch of the European Stability Mechanism in Luxembourg, which will eventually have €500bn (£405bn) at its disposal.

Osborne told conference that he would need to make extra cuts in welfare spending until 2018 to reduce the UK’s structural deficit. He blamed the slowdown in the global economy for the difficulties faced by the UK as it seeks to increase exports and rebalance the economy towards manufacturing.

The global economy will grow at 3.3% this year and 3.6% next year, the IMF said, down 0.2 and 0.3 points respectively from forecasts earlier this year. The UK is expected to suffer a 0.4% reduction in national income this year before recovering to 1.1% next year. Only two years ago, world output was 5.1% and the recovery from the 2008 crash seemed under way.

Since then a fall in demand across the west has forced China to cut production. Countries dependent on the sale of commodities have experienced falling prices, further eroding their capacity to pick up the slack left by indebted developed nations.

The IMF’s first deputy managing director David Lipton blamed much of the instability and fear in the global economy on the US, which he said needs to do more to show it is trying to address the expiring tax cuts and automatic spending reductions that will hit early next year unless Congress acts. While most of the focus has been on Europe, Lipton stressed that the US fiscal problems also posed a significant threat.

“We would like to see the United States lower the level of uncertainty by embracing more specifically the need to avoid the fiscal cliff and deal with the medium-term problems,” said Lipton, a former economic adviser to President Barack Obama.