Whether the trigger is a government default in Greece, a bank failure or some other traumatic event, “the world could be plunged into another recession,” said Olivier Blanchard, the IMF’s economic counselor. “The world recovery, which was weak in the first place, is in danger of stalling.”
The agency’s latest forecasts suggest that the process may be underway. Projected worldwide economic growth for 2012 was trimmed to 3.25 percent from the 4 percent rate projected in September. China and India, which have become major engines of global growth, are predicted to cool to around 8.2 percent and 7 percent, respectively. The IMF projects that the euro zone will fall into recession and contract by about 0.5 percent this year.
The U.S. economy’s projected growth rate has been holding steady at 1.8 percent since September, the IMF said.
The new reports suggest that the world economy is being undermined by some of the policies the IMF has recommended in recent months to address government debt and strengthen Europe’s banking system. Along with other recent reports issued by the World Bank and private organizations, the IMF studies underscore the major quandary facing policymakers in the United States, Europe and elsewhere as they confront high unemployment rates, slow growth and in some cases the threat of public unrest.
Growth is now so precarious, the agency said, that deficit reduction in the United States and stronger European nations such as Germany should take a back seat.
The IMF said the “accident prone” U.S. political system is at risk of pushing too hard on the brakes. If Congress does not renew the payroll tax cut and extend unemployment benefits that are set to expire in February, government spending this year would drop by more than 2 percent of the country’s annual output, “with negative repercussions for the still unsettled economic outlook,” the agency said.
The Obama administration and Republicans in Congress have been battling over whether and how to extend the payroll tax cut and jobless benefits. IMF officials say they worry that these political fights are distracting the U.S. government from developing a plan to address the chronic problems of long-term spending on health care and retirement.
The IMF has begun pushing countries in Europe and beyond to gird for the worst. The agency wants euro-zone nations to commit hundreds of billions of dollars to potential bailouts of Italy and Spain. Those countries are forecast to contract sharply, with a downturn of more than 2 percent in Italy making it that much harder for its government to meet its spending targets and retain the faith of investors on world bond markets. The IMF also wants to boost its own war chest and is pressing world economic powers to make an additional $500 billion available should it be needed.