An unexpectedly stubborn Euro zone recession and weakness in Japan will weigh on global economic growth this year before a rebound in 2014 that should deliver the fastest expansion since 2010, according to the International Monetary Fund.
The IMF trimmed its 2013 forecast for global growth to 3.5% from the 3.6% it projected in October, but said it looked for a 4.1% expansion in 2014 if a recovery takes a firm hold in the Euro zone. It said the world economy grew 3.2% last year.
Healthy global growth rates of above 4% were last seen in 2010, when output expanded 5.1% as the global financial crisis eased.
Optimism is in the air, particularly in financial markets, and some cautious optimism may indeed be justified, IMF chief economist Olivier Blanchard said at a news conference.
Comparing to where we were at the same time last year, acute risks have decreased, he said, noting that Washington had largely dodged its so-called fiscal cliff and that policy actions in Europe had helped calm the region's debt crisis.
Still, the IMF warned that big downside risks remained, including the possibility the Euro zone's crisis could flare anew and the US Congress could tighten the budget excessively.
We may have avoided the cliffs, but we still face high mountains, Blanchard said.
Precisely on Thursday the US House of Representatives passed an extension of borrowing authority under the federal debt limit to May 19, putting the (opposition) Republican plan on a fast track to enactment after top Senate Democrats endorsed it. The 285-144 vote in the House fell largely along party lines, with many Democrats objecting to the short-term nature of the extension.
The IMF said the US economy was set to expand 2% this year, with growth rising above trend in the second half of this year and reaching 3% in 2014.
The priority is to avoid excessive fiscal consolidation in the short term, promptly raising the debt ceiling, and agree on a credible medium-term fiscal consolidation plan, focused on entitlement and tax reform, it said.