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9.20.2011 IMF: Global economy has entered dangerous new phase


In its World Economic Outlook bi-annual report, the IMF says the prognosis for developed economies is "weak and bumpy expansion".

The report warns that issues surrounding the US and eurozone economies could drag them into recession.

It predicts that global GDP will expand "at an anaemic pace of 1.5% in 2011".

It believes global growth will shrink to 4% in 2012 from 5% in 2010 on factors such as "major financial turbulence in the eurozone".

Major risks

The IMF cites both the eurozone debt crisis and the fragile economic position of the US as the major risks to world economic growth.

The IMF report urges the European Central Bank (ECB) to "intervene strongly to maintain orderly conditions in sovereign debt markets".

It comes after credit rating agency Standard and Poor's downgraded Italy's debt rating amid mounting concerns about the country's finances.

Leaders across Europe have been criticised for failing to act quickly enough over sovereign debt.

On Monday, the IMF warned Athens to implement agreed reforms or miss an 8bn-euro bailout installment set for October, viewed as vital to keeping state finances afloat.

The report said: "Leaders must stand by their commitments to do whatever it takes to preserve trust in national policies and the euro."

"Fragile" financial institutions needed to get private cash to survive over funds from the public purse, or be "restructured or closed", said the IMF.

The UK and other countries has also been cut, according to the report.

Writing on her blog, BBC economics editor Stephanie Flanders said: "The shorter term growth forecast has been cut for every country listed - with particularly large downward revisions for the US and Italy. "

Among the major advanced economies, the IMF now thinks Germany will be the only country to grow by more than 2% in 2011. In 2012, none will grow that fast, except Japan, which will have seen its economy shrink this year due to the earthquake.

The UK growth forecast for 2011 has been revised downwards 1.5% to 1.1%.

For 2012, the IMF has reduced its estimate of economic growth from 2.3% to 1.6%.

In a speech on Tuesday, European Competition Commissioner Joaquin Almunia warned more banks in the region needed to be recapitalised.

He said: "The worsening of the sovereign debt crisis, its impact on a fragile banking system and the continuing tensions in funding markets all point to the possible needs for further recapitalistion of banks on top of the nine that failed the stress tests earlier this year."

US debt

The IMF report also voices concerns about the US economic recovery and the chance it might "suffer further blows" including a weak housing market and worsening financial conditions.

It warns that either of the issues could drag both the US and the euro area into recession.

It suggests that the US needs to devise a plan to "put public debt on a sustainable path and implement policies to sustain the recovery".

The IMF has also voiced fears that the US is facing what it calls a "very sluggish recovery of employment".

"Although [US] unemployment is below post-World War II highs, job losses during the crisis were unprecedented and came on top of lacklustre employment performance during the preceding decade," the report said.

It added that news of the US housing market had been disappointing, with "no end in sight to the overhang of excess supply and declining prices".

Japan needed to pursue "more ambitious measures" to deal with its public debts while dealing with the reconstruction work following the March tsunami and earthquake.