Risks Of Global Economic Slowdown Are 'Alarmingly High,' IMF Warns

By Mark Memmott

Published October 9, 2012 at 8:10 AM CDT

In China's Anhui province, a worker unloads steel bars at a factory. A slowdown in China and other major nations threatens to pull the global economy into recession, the International Monetary Fund warns.

Saying that the global economic recovery "has suffered new setbacks, and uncertainty weighs heavily on the outlook," the International Monetary Fund today warned that the probability of "recession in advanced economies and a serious slowdown in emerging market and developing economies" next year have gone up.

The fund said its research indicates the risk of those things occurring in 2013 "has risen to about 17 percent, up from about 4 percent in April 2012."

The IMF trimmed its forecast for next year's global economic growth by 0.3 percentage points, to 3.3 percent. By the IMF's definition, the global economy can be in recession if growth is so weak that it doesn't support healthy growth in key indicators such as employment and production.

It also warned that things could be even worse if policymakers don't properly handle two looming potential crises. In a statement, it said that:

"The IMF said that its forecast rested on two crucial policy assumptions—that European policymakers get the euro area crisis under control and that policymakers in the United States take action of tackle the 'fiscal cliff' and do not allow automatic tax increases and spending cuts to take effect. Failure to act on either issue would make growth prospects far worse.

"The forecast said that monetary policy in advanced economies was expected to remain supportive. Major central banks have recently launched new programs to buy bonds and keep interest rates low. But the global financial system remains fragile and efforts in advanced economies to rein in budgetary spending, while necessary, have slowed a recovery."

The Wall Street Journal notes that:

"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."