MercoPress. South Atlantic News Agency

IMF slashes growth forecasts for US and Euro zone; warns against higher rates

Lagarde said that in spite of the situation, “it does not foresee a global recession”

The IMF has slashed its growth forecasts for the United States and said the Federal Reserve and the European Central Bank must be ready to ease policy.

The IMF sharply revised down its forecast for U.S. 2011 growth to 1.6% from a 2.5% forecast made just two months ago. It lowered the outlook for 2012 to 2% from 2.7% according to a draft of the IMF World Economic Outlook to be issued on September 20 and to which the Italian government agency ANSA had access.

In view of growing risks to US growth the Fed “should stand ready to adopt new non-conventional measures to sustain the economy” ANSA quoted the report as saying.

The revisions are in line with recent comments by IMF chief Christine Lagarde and other senior Fund officials, who have warned about a weakening in the global recovery and deterioration in the outlook.

The IMF has, however, made clear it does not foresee a global recession.

Worried about sluggish European growth, Lagarde stepped up appeals the IMF has been making to Europe since 2009 to ensure its banks are adequately capitalized.

In a speech on Saturday at the Fed's annual retreat in Jackson Hole, Wyoming, Lagarde warned that the global economy had entered a dangerous new phase and she called for urgent action, including a “mandatory substantial recapitalization” of European banks.

She urged US policymakers to strike a balance between reducing public debt and sustaining the recovery. She said central banks should stand ready to launch fresh unconventional policy actions if needed to safeguard the global economy.

The Fund trimmed its Euro zone 2011 growth forecast to 1.9% from 2% and cut the 2012 forecast to 1.4% from 1.7%, according to ANSA.

With growth faltering and inflation risks also diminishing in the Euro zone, the ECB should avoid raising interest rates and has room to ease monetary policy if downside growth risks persist, the IMF said, according to ANSA.

The ECB should also “continue to intervene strongly on sovereign debt markets to avoid excess liquidity”.

The bank this month began buying Italian and Spanish government bonds to stave off a market attack which had sent yields rising to unsustainable levels.

The IMF marginally lowered its forecast for global growth this year to 4.2% from a 4.3% forecast in June, and lowered its 2012 projection to 4.3% from 4.5%.

The outlook for the Euro zone's largest economy, Germany, was left unchanged for 2011 at 3.2% but the 2012 forecast was cut to 1.6% from 2%. The report cut French 2011 growth by 0.3 percentage points to 1.8% and lowered the 2012 forecast by the same amount to 1.6%.

Italy's outlook was lowered to 0.8% this year from 1% and the forecast for 2012 was cut to 0.7% from 1.3%, leaving Italy in its customary position as the most sluggish among the world's large economies.

Spain's growth forecasts were cut to 0.7% from 0.8% for this year and to 1.3% from 1.6% for 2012, ANSA reported.