Downbeat IMF warns world faces years of low growth without reform

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The world faces years of sluggish growth unless leading economies undertake difficult economic reforms, the International Monetary Fund warned yesterday in a downbeat world economic outlook.

Launching its twice-yearly forecasts amid tensions over the US government shutdown, the fund trimmed predictions of global expansion for 2013 and 2014 with all the downgrade stemming from weaker prospects in emerging economies.

The message to finance ministers and central bankers ahead of this week’s meeting was that they must raise their game if the world economy is to return to the pre-crisis 4 per cent plus growth rates. This year global expansion is set to be just 2.9 per cent, the lowest in the post-crisis period and it is forecast to rise only to 3.6 per cent next year, a rate the IMF thinks is a “subdued medium-term growth trajectory”.

Olivier Blanchard, IMF chief economist, said compared with the early years of the global recovery when "many things could be repaired relatively easily", the necessary reforms were now more complex. "I think there is a bit of adjustment fatigue which is leading to less reform," he said.

Although the most upbeat elements of the forecasts were in advanced economies, Mr Blanchard warned that if US politicians failed to resolve arguments over the budget and public debt, the result would be “an extreme fiscal consolidation and [this would] almost surely derail the US recovery” with wider global disruption.

“If there was a problem lifting the debt ceiling, it could well be that what is now a recovery would turn into a recession or even worse,” he said.

The warnings came as investors accelerated their exit from the Treasury bill market, as concern mounted about market turmoil should a failure to raise the debt ceiling result in a default this month.

Treasury bills maturing later this month and in early November rose above 30 basis points, their highest level since late 2008 when the Federal Reserve adopted a zero interest rate policy and anchored short-term interest rates.

"We are really seeing signs of stress showing up in the plumbing of the financial system," said John Brady, senior vice-president at RJ O'Brien. "It's fair to say that banks don't want to take Treasury bills as collateral if in fact they are not going to be paid."

Outside the US, the IMF report showed advanced economies were gaining momentum, and the report predicted an end to euro zone contraction next year with 1 per cent growth. – Copyright The Financial Times Limited 2013