Europe: Cause of the Looming Global Economic Dilemma

The International Monetary Fund has stepped up its warnings on risks to the global economy, especially from Europe, as it trimmed its growth forecast for the rest of the year.

The world economy appeared weaker since its assessment just three months ago, and while growth was only slightly off the expected pace, downside risks continue to loom large. If policy reactions in major economies remain inadequate or too slow, fissures could deepen, with risks particularly high in Spain and Italy. In the past three months, the global recovery, which was not strong to start with, has shown signs of further weakness. Financial market and sovereign stress in the Euro area periphery have ratcheted up, while growth has fallen below expectations in a number of major emerging-market economies.

In fact, renewed deterioration in the markets for European sovereign debt is perceived as a sign that Euro Zone leaders need to move fast on pledged reforms. The main risk is obvious. It is that the vicious circle in Spain and Italy becomes stronger, that output falls even more than it does, that one of these countries loses its financial access to markets. The implications of such an event could easily derail the world recovery.

Moreover, the overhanging risk from US political stasis that could send the country over a fiscal cliff due to laws that, if not changed, will force massive government spending cuts coupled with automatic tax hikes on January 1 that would severely crunch the world’s largest economy.

After forecasts in April that the global economy would expand by 3.5 percent this year, estimated were cut 0.1 percent off the forecast, but that the number remained at 3.5 percent because of rounding. For 2013, the forecast is 3.9 per cent, down from 4.1 percent. The change in the worldwide outlook mainly came from sharp cuts to growth forecasts for the large emerging economies such as China, India, Brazil and newly industrialised Asia.

But in addition, slower-than-expected growth in the United States, Britain and France, among the major industrialised nations is foreseen. Additionally, Spain’s recession would persist through 2013, after having forecast in April that the country’s economy would return to growth next year. On the bright side, forecasts for this year for Germany and Japan were revised higher, though the 2013 prediction for each was also trimmed slightly.

Article by: AlgosysFx Forex Trading Solutions