Tuesday, October 11, 2011

The International Monetary Fund Reduces the Economic Forecast for Europe and the United States

Detroit Free Press: IMF Sharply Downgrades Outlook for U.S., Europe
Guardian: IMF wants Europe to get its Finger out and US Politicians Should Behave like Adults
The Jerusalem Post: IMF to Europe: Get Your Act Together

The International Monetary Fund (IMF) recently warned that the world economy has entered a dangerous phase and that national governments need to take strong actions to improve the world economic outlook. The IMF has significantly downgraded the financial outlook for both the United States and Europe through 2012. The IMF forecasts that the U.S. economy will grow by 1.5% in 2011 and 1.8% in 2012, as compared to its prior projections of 2.5% and 2.7% respectively. For the seventeen countries that use the Euro as their currency (the Eurozone), the IMF has forecasted economic growth of 1.6% in 2011 and 1.1% in 2012, which are reductions from prior forecasts of 2% and 1.7% respectively.

Within the United States, the IMF believes a sharp drop in the stock market and political indecision surrounding the government’s deficit reduction plan has created uncertainty. This uncertainty has caused consumers and corporations to save their money instead of spending or reinvesting, which slows economic growth. These and other factors have contributed to an annualized growth rate of .7% in the first half of 2011, which is well below even the revised IMF forecast.

The pessimistic forecast for the Eurozone centers on the sovereign debt crisis. The IMF is concerned that some Eurozone countries will not sufficiently control their debt, which may lead to destabilization within the region. When banks, consumers, and companies are unsure about their economic future, they are less likely to lend money, make long-term investments, or make discretionary purchases, and will instead save excess cash. Reduced lending, investment, and spending leads to lower economic growth, and, therefore, lower revenues for governments to use in paying their debts. The IMF has criticized European leadership for not moving quickly enough to remedy the uncertainty surrounding the debt crisis.

To combat slowing economic growth, the IMF suggests that European central banks and the United States Federal Reserve Bank continue searching for ways to lower borrowing costs, which would hopefully spur increased spending and investment. The IMF also suggests that the United States and European governments spend money to stimulate economic activity instead of reducing spending to lower budget deficits.

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