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IMF says US, emerging economies pose greater risk to global economy

The economic crisis in Europe has largely been overcome, says the IMF. In a reversal of roles, it's the United States and emerging economies that pose the larger risk for global economic growth - not the eurozone.

The mood in the run up to the fall meeting of the International Monetary Fund (IMF) in Washington, DC, has been quite subdued. For the sixth time in a row, the IMF has revised its growth forecast downward. The global economy is now expected to grow 2.9 percent this year and 3.6 percent next year - as long as no new catastrophic shocks disrupt the economy. But there could be just such a shock if the United States fails to raise its legally prescribed debt ceiling on October 17, which would put Washington in default.

The economic consequences of the temporary US government shutdown can be managed, said IMF chief economist Olivier Blanchard on Tuesday in Washington, as he presented the new economic outlook.

"Failure to lift the debt ceiling would however be a major event," Blanchard said. "Prolonged failure would lead to an extreme fiscal consolidation and almost surely devalue the US recovery.

"But the effects of any failure to repay the debt would be felt right away, leading to potentially major disruptions in financial markets - both in the US and abroad," he continued.

Risky monetary policy

In addition to the US budget and debt ceiling battles, the IMF also called the monetary policy of central banks as another major risk.

"It is, therefore, time to make plans for an exit from both quantitative easing and zero policy rates," Blanchard said. "However, it is not time yet to implement those plans."

epa02926928 International Monetary Fund's Economic Counsellor Olivier Blanchard presents the World Economic Outlook at the IMF Headquarters in Washington, DC, USA, 20 September 2011. EPA/STEPHEN JAFFE / IMF HANDOUT EDITORIAL USE ONLY/NO SALES +++(c) dpa - Bildfunk+++

Blanchard: US debt battle poses major risks

While the IMF expert said moving away from loose monetary policy would pose "no major technical issue," it's a "new and delicate" challenge for the US Federal Reserve to communicate this policy shift in a way that doesn't cause volatility.

That was clearly a reference to outgoing US Federal Reserve Chairman Ben Bernanke, who announced in just 33 words last May that the Fed might consider slowing the printing press if the US economy continues to recover. A "Washington Post" reporter wrote on Monday that each word cost $12 billion. That's because the IMF estimated the capital flight from emerging economies after Bernanke's announcement at $404.4 billion.

Europe no longer in the hot seat

The Europeans no longer sit in the hot seat as the IMF's main cause of concern when it comes to economic growth. Early in the year, the eurozone was considered a risk for the global economy and the emerging economies were viewed as growth's great hope. But now the roles have been reversed. The emerging economies have become a source of concern as their growth slows, while the EU has been praised by the IMF for its progress.

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Slowing growth in emerging economies poses a risk to the global economy, according to the IMF

The eurozone has put the recession behind it and will see a small amount of net growth next year, according to Jörg Decressin, the deputy director of the research division at the IMF. Decressin said there had been a lot of progress in budget consolidation and the easing of austerity could stimulate the economy.

But he also warned that there was a long way to go before Europe had overcome its high unemployment rate. That's why the IMF continues to promote structural reform in Europe and in particular a banking union, Decressin said. Above all, the countries on the eurozone's southern periphery need to invest everything in regaining their lost competitiveness, he said.

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