Indebted states 'playing with fire' if budget deficits not cut, warns IMF

THE INTERNATIONAL Monetary Fund has downgraded its forecasts for global economic growth and said the risks to the world economy have increased in recent months.

In its regular assessment of global economic prospects, the fund warned the US and debt-ridden European countries they were “playing with fire” unless they took immediate steps to reduce their budget deficits.

Of five European countries for which the fund gave estimates of the size of budgetary adjustments in 2011, Ireland’s was the second smallest. According to estimates in the fund’s Fiscal Monitor report, the budgetary adjustment for Ireland would amount to 3.8 per cent of gross domestic product (GDP).

This compared with an adjustment of 5.7 per cent in Portugal and 5.1 per cent in Greece, the two other euro area countries in receipt of EU-IMF bailouts.

Separately, and according to the fund’s Global Financial Stability Report, Ireland’s banks were the least well-capitalised at the end of 2010 of a group of 14 countries.

The fund said bigger threats to growth had emerged since its previous report in April, citing the euro zone debt crisis and signs of overheating in emerging market economies. It forecast that US GDP would grow a tepid 2.5 per cent this year and 2.7 per cent in 2012. In its forecast just two months ago, it had expected 2.8 per cent and 2.9 per cent growth, respectively.

With regard to the global economy, the fund struck a measured tone, saying the slowdown of recent months should be “temporary”. It trimmed its forecast for global growth this year only slightly, to 4.3 per cent from 4.4 per cent, and maintained its estimate for robust Chinese growth of 9.6 per cent, despite recent signs of a slowdown there.

The fund, which has endured its own political crisis due to the resignation of its chief, Dominique Strauss-Kahn, on sexual assault charges, said the global economy “has gained ground” despite a slowdown it deemed “not reassuring”. It attributed the weakness to temporary disruptions such as the Japan earthquake, bad weather pressuring food crops and higher energy prices. Global growth should “reaccelerate” during the second half of the year, the report said.

The fund raised its growth view for the euro area in 2011 to 2.0 per cent from 1.6 per cent. For 2012, the fund saw growth at 1.7 per cent, little changed from its previous 1.8 per cent. – (Additional reporting: Reuters)