IMF Cuts Growth Forecast For Global Economy, Warns US Government Default Risk

The International Monetary Fund trimmed its forecast for global economic growth this year mainly because emerging economies have cooled off and warned that a U.S. government default could “seriously damage” the world economy.

The IMF said Tuesday that the global economy will grow 2.9 percent in 2013 and 3.6 percent in 2014. Both are 0.2 percentage points lower than the group’s July forecasts. It sees emerging economies growing 4.5 percent this year, 0.5 percentage point less than three months ago, as projections were reduced for China, Mexico, India and Russia.

“Advanced economies are gradually strengthening” while “growth in emerging-market economies has slowed,” IMF Chief Economist Olivier Blanchard wrote in a foreword to the World Economic Outlook report. “This confluence is leading to tensions, with emerging-market economies facing the dual challenges of slowing growth and tighter global financial conditions.”

The Washington-based lending institution also lowered its immediate outlook for the U.S. economy – from 1.7 percent to 1.6 percent for this year, and from 2.8 percent to 2.6 percent for 2014. The IMF’s forecast assumes the U.S. government would partially shut down, but would reach an agreement on the nation’s debt ceiling before an Oct. 17 deadline.

“A longer shutdown could have sizable adverse growth implications,” the IMF said in the report. “A failure to promptly raise the debt ceiling could also adversely affect financial markets and economic activity, with spillovers to the rest of the world.”

Assuming the U.S. avoids a default, the next big challenge will be for the Federal Reserve to start paring back its monthly bond purchases – a move that could put emerging economies at risk.

“U.S. monetary policy is reaching a turning point, and this has led to an unexpectedly large increase in long-term yields in the United States and many other economies,” the IMF said. “This change could pose risks for emerging market economies, where activity is slowing and asset quality weakening.”

The IMF now expects China to expand about 7.6 percent this year, and sees the Japanese economy expanding about 2 percent this year. The fund raised its forecast for the 17-country euro area to a contraction of 0.4 percent this year compared with a 0.6 percent decline in July. It now expects an expansion of 1 percent in 2014 instead of 0.9 percent three months ago.