MercoPress. South Atlantic News Agency

IMF to cut global growth forecast because of Euro crisis and US ‘fiscal cliff’

The Euro zone is the greatest risk to the world economy

The International Monetary Fund is set to cut its forecast for global growth next month when it updates its projections for the world economy, the head of the IMF said.

“We continue to project a gradual recovery, but global growth will likely be a bit weaker than we had anticipated even in July, and our forecast has trended downward over the last 12 months,” IMF Managing Director Christine Lagarde said in a speech previewing the IMF/World Bank meetings in Tokyo on Oct. 12-14.

The biggest factor weighing on the world economy was uncertainty among investors over whether policymakers in advanced economies will deliver on promises, Lagarde added.

In July, the IMF cut its global growth projection for 2013 to 3.9% but left its 2012 forecast unchanged at 3.5%.

Lagarde said uncertainty over the debt crisis in the Euro zone was the greatest risk to the world economy, but the possibility of a so-called “fiscal cliff” of expiring tax cuts and automatic government spending reductions next year in the United States was a also a “serious” risk.

She said there was now also evidence of a slowdown in emerging economies, and “great concern” in poor countries about rising food prices and volatile commodity prices, as well as growing frustrations with transitions across the Middle East.

Lagarde said financial markets were buoyed by recent decisions among European leaders to address the euro zone crisis and now want to see the measures implemented in a coordinated manner.

She again called on Europe to take steps toward a banking union. “We continue to believe it should be initiated as soon as possible - to break the vicious cycle between banks and sovereigns,” she said.

In the United States, Lagarde urged political clarity and actions to avoid the scheduled abrupt tightening of fiscal policy at the start of next year, as well as a “concrete plan” to gradually lower debt.