By Steve Goldstein, MarketWatch
WASHINGTON (MarketWatch) — The International Monetary Fund on Tuesday slashed its economic forecast, responding to slow private-sector demand, sovereign debt and bank troubles, the Japanese earthquake and Middle East unrest.
The new forecasts issued in the world economic outlook aren’t out of step with Wall Street. For instance, the IMF cut its U.S. growth forecast for this year to 1.5% and to 1.8% next year, which for 2011 is a full percentage point lower than three months ago and 0.9% below its prior forecast for 2012.
The 2011 view is a just shade below Wall Street views of 1.6% U.S. growth, though the IMF’s call for 2012 is more conservative than the 2.2% growth seen by private-sector economists, according to data compiled by Blue Chip Economic Indicators.
“The strong cyclical rebound in global industrial production and trade in 2010 was never expected to persist. However, in crisis-hit advanced economies, especially the United States, the handover from public to private demand is taking more time than anticipated,” the IMF said in a report.
The IMF said unemployment and low wages are likely to stay high for some time, and house prices show no sign of stabilizing in hard-hit areas including the U.S. and Spain.
And the agency frets over the state of financials: the IMF said its staff’s financial conditions indices, which consider developments in equity and bond prices, spreads, and bank lending volume in the United States and the euro area, have tightened noticeably.
Risks are higher than even three months ago, the IMF says in identifying weak sovereigns and banks in the developed world, insufficiently strong policies to address the legacy of the crisis, vulnerabilities in emerging-market economies and volatile commodity prices and geopolitical tensions.
The IMF report sounded the same go-slow on short-term government spending cuts but make medium-term adjustments theme that its new leader, Christine Lagarde, has sounded. Lagarde joined the IMF in July, about two weeks after the previous world economic outlook was published.
“If (contrary to WEO assumptions) payroll tax relief and help for the unemployed in the United States are not prolonged, U.S. growth could be significantly lower. By the same token, if sound medium-term consolidation plans are not implemented, households and businesses may take an increasingly dim view of future prospects and drastically raise their saving rates. The result could be a lost decade for growth,” the report said.
Steve Goldstein is MarketWatch's Washington bureau chief.
