On Tuesday, the International Monetary Fund (IMF) warned the United States and Europe that policymakers need to get their act together before the global economy is threatened once again by recession. The IMF said financial volatility had increased dramatically as investors worried about the escalating sovereign debt crisis in the euro zone and a weakening U.S. economy.
In its report, the IMF stated that Europe and the U.S. pose the biggest risks to the global economic outlook. The IMF warned that political gridlock could be the undoing of the two regions. The IMF also called on Japan to lower its public debt. “Policy indecision has exacerbated uncertainty and added to financial strains, feeding back into the real economy,” the IMF said in its latest World Economic Outlook report.
The IMF has cut its forecast for global growth to 4% for this year and next, trimming projections for almost every region of the world and saying risks remained on the downside. Just three months ago the IMF had projected an expansion of 4.3 percent for 2011 and 4.5 percent for 2012.
The IMF urged European leaders to do whatever it takes to preserve confidence in national policies and in the euro. The IMF also urged the European Central Bank to lower interest rates if the continued risk to growth persists. Investors have questioned Europe’s ability to come up with a convincing solution to its festering sovereign debt crisis, which has rattled confidence and roiled financial markets.
On Monday, the IMF told Greece to shrink its public sector and improve tax collection to avoid running out of money by October. Also, Standard and Poor’s downgraded its credit ratings on Italy by one notch and kept its outlook on negative. This was a move that surprised financial markets.
The IMF cautioned that quick judgment budget cuts in the United States could further weaken growth, and it said the U.S. Federal Reserve should stand ready to ease monetary policy further. The Fed meets on Tuesday and Wednesday of this week. The IMF trimmed its forecasts for U.S. growth to 1.5 percent for 2011 and 1.8 percent for 2012, down from a June projection of 2.5 percent and 2.7 percent, respectively.