WEDNESDAY SEPTEMBER 21: Slowdown worse than thought: Italy downgraded; IMF lowers forecasts for global economy

WASHINGTON: The global economy is much weaker than believed just months ago, and growth will pick up only slightly next year, the International Monetary Fund said Tuesday. The IMF lowered its growth forecasts for the global economy to 4.0 percent for 2011 and 2012, saying activity had "weakened significantly," but warned of a return to recession if Western leaders fail to get their economies back on track.
"The evidence points to continued, uneven growth," the IMF said in a twice-yearly outlook report. The global economy, which rebounded in 2010 following the 2008-2009 Great Recession, has been dragged down by problems in the advanced countries, particularly the United States and the eurozone, it said.
And emerging market economies that have been the recovery's driving force, such as China and India, will not escape unscathed from the weakness in the advanced economies, the Washington-based lender said. The IMF's World Economic Outlook report said global growth will be half a percentage point lower than it estimated in June, and well below the 5.1 percent pace in 2010.
"Anemic" consumption in advanced economies and spiking financial volatility over worries about US and eurozone public debt have put the brakes on growth. The slower recovery in advanced economies this year was "a development we largely failed to perceive as it was happening," acknowledged Olivier Blanchard, the chief economist of the 187-nation institution.
A large increase in fiscal and financial uncertainty gathered steam in August, roiling financial markets as investors watched political gridlock in Washington over US debt and deficits and the spreading contagion of Greece's debt crisis in the eurozone. "Markets have clearly become more sceptical about the ability of many countries to stabilise their public debt," Blanchard said in a statement. "Strong policies are urgently needed to improve the outlook and reduce the risks," he said.
Reuters adds: Standard & Poor's cut Italy's credit rating in a surprise move that increased strains on the debt-stressed eurozone, and the International Monetary Fund said Europe's leaders were failing to act decisively enough to resolve the crisis.
Analysts said the one-notch downgrade, citing poor growth prospects and political instability, was ominous for the global economy and would add to mounting strains on European banks as talks to avoid a Greek default dragged on. S&P's rating is now three notches below rival agency Moody's, putting Italy below Slovakia and on a par with Malta.
"There is a wide perception that policymakers are one step behind the action, markets," IMF chief economist Olivier Blanchard told a news conference after the Fund warned both Europe and the United States could slip back into recession. "Europe must get its act together," he said.
Italy's downgrade overshadowed signs of progress in Greece's negotiations with international lenders to avoid running out of money within weeks, and news that Brazil was willing to pump in $10 billion through the IMF to aid Europe. "Italy is a much bigger deal than Greece," said Kathy Lien, director of currency research at GFT in New York.
Italian Prime Minister Silvio Berlusconi said S&P's decision did not reflect reality and his government was already preparing measures to spur growth. "The assessments by Standard & Poor's seem dictated more by newspaper stories than by reality and appear to be negatively influenced by political considerations," Berlusconi said.
Under mounting pressure to cut its debt, the Berlusconi government pushed a 59.8 billion euro austerity plan through parliament last week, pledging a balanced budget by 2013. But there has been little confidence that the much-revised package of tax hikes and spending cuts, agreed only after repeated chopping and changing, will do anything to address Italy's underlying problem of stagnant growth.
"We believe the reduced pace of Italy's economic activity to date will make the government's revised fiscal targets difficult to achieve," S&P said in a statement. Europe has come under increasing global pressure to resolve a crisis that has seen numerous sovereign rating downgrades and financial rescues for Greece, Portugal and Ireland. A bailout of Italy would overwhelm eurozone resources.
Analysts said the crisis should be addressed by policymakers starting with the US Federal Reserve Board meeting on Tuesday and Wednesday and the G20 and IMF/World Bank in Washington later in the week. "I think it's going to necessitate some sort of action by the G20 this weekend," said Lien. That leaves plenty of scope for disappointment. The United States has heaped pressure on eurozone leaders to act more decisively but has received a decidedly cool response.
An EU document, obtained by Reuters, showed the bloc will call on China to boost domestic demand and on the United States and Japan to tackle their public deficits as part of global efforts to rebalance growth, suggesting there will be no meeting of minds in Washington.
A government official in Berlin said Germany would stress the importance of consolidating public finances, a rebuff to US calls for Europe's stronger economies to provide more stimulus. In the latest signs of stress on the banking system due to the debt crisis, three sources said Bank of China had stopped foreign exchange forwards and swaps trading with top French banks Societe Generale, BNP Paribas and Credit Agricole as well as Switzerland's UBS. The Bank of China's decision reflected a broad unease about counterparty risk in the eurozone crisis, three sources with direct knowledge of the matter said.