IMF sees slower global growth, rising headwinds

The International Monetary Fund said Friday the global economy has hit a speed bump and warned the United States and Europe to get their fiscal houses in order to maintain momentum. "Activity is slowing down temporarily" amid rising negative growth headwinds, the Washington-based lender said. "Greater-than-anticipated weakness in US activity and renewed financial volatility from concerns about the depth of fiscal challenges in the euro area periphery pose greater downside risks," the IMF said, in updates of April economic, financial and budgetary reports issued in Sao Paulo. The IMF lowered its 2011 growth forecast a notch, projecting an annual rate of 4.3 percent, a tenth of a point lower than it had forecasted two months ago. There are "very clear risks" to the global economic recovery, Olivier Blanchard, the IMF's chief economist, told a news conference in Brazil. He also pointed to the risk of "overheating" in some emerging economies in Asia and Latin America. "Inflation is increasing beyond what can be explained by rising commodity and food prices," he said. Blanchard did not identify the specific countries at risk, but appeared to be alluding to at least China and Brazil, both of which have seen inflation spike sharply higher in recent months. Meanwhile, in the United States, growth has "disappointed" since the beginning of the year, the IMF said. The world's biggest economy was projected to expand by 2.5 percent this year, down from the 2.8 percent estimate in April and 3.0 percent in January. The US slowdown was "in part due to transitory factors -- including higher commodity prices, bad weather, and supply chain disruptions from the Japanese earthquake on US manufacturing," the IMF explained. "In contrast, growth surprised on the upside in the euro area, powered by more upbeat investment in Germany and France." For the 17-nation eurozone, the IMF raised its 2011 growth estimate to 2.0 percent, from 1.6 percent previously. Germany, Europe's economic powerhouse, was expected to have the strongest surge of any of the Group of Seven rich countries: 3.2 percent. The French economy was projected to grow 2.1 percent. But it slashed its estimate for Japan, hit by the March 11 earthquake-tsunami disaster, predicting the economy would contract 0.7 percent. China remained the global growth champion, its rate unchanged at 9.6 percent. Significant risks to the global economy's recovery from a 2009 recession are emanating from the world's two big economic blocs, the US and Europe, the 187-nation institution warned. The IMF also joined calls for the US Congress to raise the country's debt limit, warning failure to act would risk a major global market upheaval. "For the United States, it is critical to immediately address the debt ceiling and launch a deficit reduction plan that includes entitlement reform and revenue-raising tax reform," it said. The US government hit its legal borrowing limit of $14.29 trillion on May 16. The Treasury has taken extraordinary technical measures to avert a debt default, but says it will run out of maneuvering room by August 2. The issue of raising the debt limit is bogged down in Congress, where President Barack Obama's Democrats are at loggerheads with Republicans, who control the House of Representatives. The Fund also admonished the European Union for lagging behind in banking reform and resolution of sovereign debt problems. "Policymakers must act now to make the financial system more robust," it said. "The current window of opportunity to prepare the financial and economic system against potential systemic shocks, importantly by providing clarity on euro area-wide solutions to strains in the periphery, could close unexpectedly." The Fund noted intensifying concerns about debt sustainability and the political will to support adjustment efforts that had pushed credit default swap spreads to new highs in Greece. The IMF also highlighted that worries about the bailed-out eurozone periphery economies of Greece, Ireland and Portugal have renewed the focus on the potential for contagion of shocks to banks. Banking systems in core European countries, such as Germany and France, still have large exposures to peripheral countries, and the pace of banking system repair has been too slow, it warned. "Thus, a more robust financial system, notably in Europe, is needed to gird against shocks."