IMF Warns UK Tightening Policies And US Political Gridlock Make New Recessions Possible And Put Global Economies At Risk

Loosening monetary policy in the United States and cutbacks in British government spending could trigger another recession or even deflation and new credit bubbles, according to the International Monetary Fund.

The IMF singled out the U.K. and U.S. for policies it calls risky in its updated World Economic Outlook report (WEO), released Wednesday.

The IMF scaled back its U.K. growth forecast from October by 0.25 percent, saying fiscal tightening, among other factors, is threatening both the British economy and other economies.

Says the report: "Domestic rebalancing from the public to the private sector is being held back by deleveraging, tight credit conditions and economic uncertainty, while declining productivity growth and high unit labor costs are holding back much-needed external rebalancing."

As for the U.S., the IMF acknowledges positive gains since the 2008-2009 recession but warns that Washington's political gridlock keeps it from thorough fiscal reform and makes it vulnerable to euro-zone problems.

"Passage of the American Taxpayer Relief Act resolved the immediate threat of a fiscal cliff but offered no durable solution to looming fiscal issues, including the need to raise the debt ceiling and the deep automatic budget cuts under sequester," the report says.

The report warns that policies intended to stabilize activity in the long term can leave large economies at high risk of recession and even deflation in the near and medium terms. The IMF says this could happen in relation to five factors: (1) very low growth or stagnation in the euro area; (2) fiscal trouble in the U.S. or Japan; (3) less slack than expected or sudden burst of inflation in advanced economies; (4) risks related to unconventional monetary policy; and (5) lower potential output in key emerging market economies.

Also, the IMF changed its 2013 outlook for the euro zone from a 0.25 percent GDP increase to a GDP decrease by that amount. The IMF cited weak external demand and ongoing fiscal consolidation.