The global economy continues to weaken but how long the slowdown persists will depend on whether U.S. and European policymakers address underlying economic challenges, the International Monetary Fund said in a report on Monday.
“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 slowdown has a more lasting component," the IMF wrote in its latest World Economic Outlook.
Much will depend on whether European and U.S. policymakers deal with their major short-term economic challenges, the IMF noted.
With the European crisis deepening, U.S. economic growth sluggish and domestic demand faltering in emerging markets, the IMF has trimmed its 2012 and 2013 global growth forecasts.
The IMF now expects the world economy to grow 3.3 percent this year, down from the 3.5 percent growth it predicted in July. It projects growth of just 3.6 percent in 2013, down from its prior estimate of 3.9 percent.
At 2.2 percent growth, the U.S. is expected to be among the fastest growing developed markets in 2012. The euro zone is forecast to contract 0.4 percent. Emerging markets are projected to grow at 5.3 percent, but the IMF did significantly lower forecasts for both Brazil and India. Brazil is now expected to grow by just 1.5 percent in 2012.
These forecasts assume that some of the policy uncertainty in the U.S. and Europe is reduced. The IMF expects European policymakers to take additional action to save the euro zone and the euro, while the U.S. policymakers will manage to avoid the “fiscal cliff” while making progress toward restoring fiscal sustainability.
If either two assumptions fail to hold, “global activity could deteriorate very sharply,” the report warned.