IMF expects lower global growth as fiscal cliff looms

By Peter Schroeder - 10/09/12 10:32 AM ET

The International Monetary Fund (IMF) is lowering its expectations for the global economy, due primarily to continued concerns over U.S. and European policymakers' ability to address their burgeoning crises.

But even as the IMF lowers its growth expectations, it said it is assuming Congress and the White House will be able to avert the "fiscal cliff," raise the debt ceiling and make "good progress" toward a comprehensive fiscal sustainability plan. However, it did not rule out it could be "disappointed" by a U.S. stalemate, or an inability by European policymakers to effect policy that averts that continent's debt crisis.

"Downside risks have increased and are considerable," the group wrote in the report, released ahead of the IMF's annual meeting in Tokyo. "The [report] forecast rests on critical policy action in the euro area and the United States, and it is very difficult to estimate the probability that this action will materialize."

The IMF now anticipates the global economy will grow 3.6 percent in 2013, down 0.3 percent from its July prediction, which was itself a downgrade from the April outlook. It anticipates the U.S. economy will grow 2.1 percent in 2013, a drop of 0.1 percent from July.

However, if Congress fails to avert the fiscal cliff, the tightening that would come from the automatic spending cuts and expiring tax cuts could throw the U.S. into a "full-fledged recession," the IMF warned. And if that weren't enough, that downturn would spill over into the global economy, as the blow to confidence would sink stock prices. Financial markets could also take another blow if Congress again pushes up against the brink on raising the debt ceiling, which is expected to be required early in 2013.

The IMF currently believes markets are considering going over the fiscal cliff a remote possibility. However, that means that if policymakers do fail to reach a compromise and the current policies take effect, it could substantially rattle markets across the world that have not priced in that risk.