“Global activity has weakened and become more uneven; confidence has fallen sharply recently; and downside risks are growing,” the International Monetary Fund said in its World Economic Outlook, published ahead of this week’s annual meetings in Washington. The IMF has cut its 2011 and 2012 global growth forecast to 4 percent, slashing projections for almost every region of the world and saying risks remained tilted to the downside. Just three months ago it had projected an expansion of 4.3 percent for 2011 and 4.5 percent for 2012.At a press conference, the IMF’s chief economist Olivier Blanchard issued what he referred to as a “call to arms” for European governments in particular to shore up their banks and use stronger measures to secure the finances of highly indebted countries.
“The global economy has entered a dangerous new phase,” said Blanchard. “The recovery has weakened considerably. Strong policies are needed to improve the outlook and reduce the risks.” The Fund gave Greece an ultimatum on Monday to introduce more budget austerity to win the release of rescue funds and escape bankruptcy early next month.
President Barack Obama’s proposal to cut taxes and spend more on infrastructure should provide much-needed short-term stimulus, the IMF said. But it needs to be paired with a longer-term plan to reduce the deficit over, the report said.
The timing of the budget cuts is key, Blanchard said. Budget cuts “cannot be too fast or it will kill growth,” Mr. Blanchard said in a statement. “It cannot be too slow or it will kill credibility.”