WSJ: IMF Cuts Global Growth Forecasts; Sees 'Alarmingly High Risks' Of 'Serious' Slowdown

TOKYO--The global economy risks skidding back toward recession just three years after pulling out of the last one, as growth slows in nearly every major nation and political problems threaten recoveries in the U.S. and euro zone, the International Monetary Fund warned.

"Risks for a serious global slowdown are alarmingly high," the IMF said Tuesday in its bleakest assessment of global growth prospects since the Great Recession of 2009.

The fund, in its World Economic Outlook ahead of this week's IMF and World Bank annual fall meetings here, forecasts the world economy will expand just 3.3% this year, down from the 3.5% it forecast in July. Global economic growth is forecast to accelerate to 3.6% in 2013, compared with an initial forecast of 3.9%. "No significant improvements appear in the offing," the IMF said. The global economy grew 3.8% in 2011 and 5.1% in 2010.

Another obstacle noted by the IMF: the absence of a simple unified message for how to avert another global downturn. The lender pressed nations for aggressive fiscal stimulus to limit the depth of the last recession. Now its advice is far more complicated, counseling some overextended nations to cut their budgets, some to embark on politically difficult economic overhauls and some, including Germany and the Netherlands, to aim for somewhat higher inflation to make struggling euro-zone countries more competitive.

The grim outlook is still more optimistic than many private-sector forecasts, and comes as the world faces an across-the-board slowdown.

The IMF upgraded growth prospects for only one major nation compared to its July forecast. It projected the U.S. would grow 2.2% this year, up from the 2.1% it previously estimated.

Worries about debt and budgets in advanced economies are compounding homegrown problems in China, Brazil, India and other emerging economies that had powered much of the global expansion in recent years.

"The deep, prolonged decline and the slow halting recovery is inevitable after a major systemic financial crisis," said Harvard economist Kenneth Rogoff, a former IMF chief economist, who has studied centuries of recoveries after banking crises.

Under the IMF's definition, global GDP doesn't have to shrink for the world to be in recession. Before the 2009 contraction, the IMF identified three other "global recessions" in the post-war period, and the shortest gap between them was seven years. They were in 1975, 1982 and 1991. The IMF defines recession as a decline in real per-capita GDP, along with weaknesses in other indicators including industrial production, trade, capital flows and joblessness.

In Tuesday's report, the IMF calculated a 17% probability that global growth falls to just 2% in 2013, which would mean a recession in wealthy nations and "serious slowdown" in emerging nations. In April, the IMF put the chance of such an outcome at just 4%.

Even the meager growth forecast by the IMF rests on two big political assumptions. One is that euro-zone members follow through on their plans to ease stresses among struggling economies, which have pushed the 17-nation currency bloc into recession, and take more steps toward long-term integration. The other is that the U.S. avoids the "fiscal cliff"--a series of tax hikes and spending cuts hitting early next year unless politicians agree to new measures--and resolves other budget concerns.

The IMF said its forecast "could again be disappointed on both accounts."

At this week's Tokyo meetings, officials from the fund's 188 member countries are expected to press Europe and the U.S. to move more swiftly as the threat of a deeper downturn looms. Central banks in both economies have stepped up their efforts in recent weeks to ease strains, but politicians remain deadlocked on key issues. The sober forecasts offer policymakers here a reminder that while financial markets in advanced economies have been relatively calm in recent weeks, that doesn't signal a fundamental global turnaround.

And there don't appear to be any easy answers. In 2009, the IMF pressed countries to boost deficit spending, which the IMF subsequently applauded for preventing a deepening of the global recession. In 2010, the IMF urged economically stronger countries to begin paring back the debt they had taken on. Indeed, the June 2010 Group of 20 leaders' summit committed the nations to halve their government deficits by 2013 and "stabilize" their debt loads by 2016--goals that now seem very unlikely to be met.

The IMF now says that global efforts to slash deficits and debt may have hurt growth because they occurred too quickly and too widely. Since the 2009 recession, the IMF said it had underestimated the negative effects on growth by fiscal consolidation.

The latest report cites particular domestic issues as part of the reason that growth is slowing. That makes it difficult to revive growth through global policy measures. In China, for instance, growth is expected to slow to 7.8% this year, rather than hit its customary 10%-plus pace, because government authorities are looking to deflate a housing bubble and build a social safety net rather than ramp up growth through a stimulus splurge.

In India, the IMF forecasts growth of 4.9%, a whopping 1.3 percentage points lower than the July forecast, as India wrestles with eliminating subsidies and making structural changes. In Japan, growth is expected to decelerate from 2.2% this year to 1.2% in 2013 as post-earthquake construction slows, and the country tries to curb its mammoth government borrowing--by some measures the most bloated in the world--by moving ahead with a plan to raise the sales tax.

"There is no risk-free way to accelerate the recovery, except politically painful supply-side structural reforms to improve tax systems, make labor markets more flexible" and other measures, said Harvard's Mr. Rogoff.