IMF trims economic expectations as threats loom

By Peter Schroeder - 07/16/12 10:41 AM ET

The global economy will grow more slowly than previously expected, and could get worse if the United States does not address the fiscal cliff, the International Monetary Fund (IMF) said Monday.

The institution now anticipates the world's economy will expand just 3.5 percent in 2012 and 3.9 percent in 2013, down 0.1 and 0.2 percent from April expectations, respectively. It also slightly lowered expectations for U.S. growth, now anticipating expansion of 2 and 2.3 percent over those years.

And that slowdown does not even account for the major dangers looming over the economy, including potential deterioration in Europe and the approaching American fiscal cliff.

"More worrisome than these revisions to the baseline forecast is the increase in downside risks,” said Olivier Blanchard, the IMF's chief economist.

Under the trimmed figures lie three key assumptions that are far from a given: that European leaders will find a way to keep troubled nations like Greece and Spain afloat through 2013, that emerging markets will find a way to stimulate growth, and that U.S. policymakers will avert the rapid fiscal contraction set to take effect in 2013 and known as the fiscal cliff.

That final threat carries significant global implications, according to the IMF. If lawmakers fail to find a way to make the nation's fiscal policy less immediately extreme, the U.S. economy could decline sharply, which would have "significant spillovers to the rest of the world," according to Blanchard.

Along similar lines, if policymakers engage in another high-drama, eleventh-hour fight over the debt limit, it could wreak havoc on financial markets and the confidence of businesses and consumers, the IMF warned.

But the IMF sees the European debt crisis as the most immediate threat to the global recovery. In particular, it is vital that European leaders find a way to ensure that the "peripheral" nations of the continent, such as Greece and Spain, succeed. While the IMF found leaders had taken some steps in the right direction recently, it is vital that reforms are quickly put in place to assuage markets and set troubled nations on the right path.