IMF sees hope beyond the crisis but cuts world growth predictions

http://www.guardian.co.uk/business/2013/jan/23/imf-world-growth-forecast-davos

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The head of the International Monetary Fund, Christine Lagarde, said on Wednesday that 2013 would be a make-or-break year for the global economy, as the Washington-based institution trimmed its growth forecasts for the US, Britain and the eurozone.

In a keynote address at the World Economic Forum, Lagarde said the biggest challenge for the year ahead was keeping up the momentum for reform.

"I believe that if we continue to act, 2013 will be a defining year in terms of finally getting beyond the crisis," the IMF managing director said. "But more than that, I believe we are standing in the antechamber of a new global economy, marked by rapidly shifting circumstances and new modes of thinking."

Lagarde was speaking hours after the IMF trimmed its growth forecast for the world economy in 2013, noting that the upturn was now expected to be more gradual than expected three months ago.

"We have avoided the collapse, let's beware of relapse, it's no time to relax," Lagarde said. "2013 will be a make-or-break year." The new global economy would be built on the principles of openness, inclusiveness and accountability.

Lagarde warned of the risks of climate change and of backsliding on necessary reforms of the financial sector, and admitted that policymakers – including the IMF – had underestimated the costs of inequality. Unless action was taken to combat global warming, the next generation would be "roasted, toasted, fried and grilled".

"I believe that the economics profession and the policy community have downplayed inequality for too long," Lagarde said. "Now all of us have a better understanding that a more equal distribution of income allows for more economic stability, more sustained economic growth, and healthier societies with stronger bonds of cohesion and trust."

Lagarde said the financial sector hid too much activity in murky and dark corners, and put its own short-term gain ahead of supporting the real economy. She listed a series of risks, including a further dilution of capital and liquidity requirements, a failure to police shadow banks and derivatives, and compensation.

"Ultimately, again, this is all about accountability: we need a financial sector that is accountable to the real economy—one that adds value, not destroys it."

In its updated World Economic Outlook, the IMF said 2013 was on course to be a better year for the global economy than 2012 but expressed concern about renewed eurozone problems or excessive action to cut the US budget deficit. "If crisis risks do not materialise and financial conditions continue to improve, global growth could be stronger than projected. However, downside risks remain significant, including renewed setbacks in the euro area and risks of excessive near-term fiscal consolidation in the United States. Policy action must urgently address these risks."

The IMF said it expected the world economy to grow by 4.1% in 2013, up from 3.5% in 2012 but 0.1 points lower than forecast in October 2012. Instead of a small 0.1% increase in the eurozone economy in 2013, the IMF is now pencilling in a decline in gross domestic product of 0.2%. Spain and Italy will endure a second year of recession, while the two biggest countries of the single currency area – Germany and France – are expected to achieve growth of 0.6% and 0.3%.

"The euro area continues to pose a large downside risk to the global outlook. In particular, risks of prolonged stagnation in the euro area as a whole will rise if the momentum for reform is not maintained", the IMF said.

The IMF has cut Britain's growth forecast by 0.1 points to 1% in 2012 and by 0.3 points to 1.9% in 2014. The US is expected to be the fastest growing of the leading western economies in 2013 at 2%, and the IMF said it was vital a budget deal was agreed speedily.