The International Monetary Fund has urged advanced economies to use "all prudent measures" to boost sluggish demand, including monetary policy, even as it trimmed 2013 growth forecasts for the global economy to 3.25 percent.
In its latest World Economic Report, chief economist Olivier Blanchard asked policymakers not to relax their efforts, but to ensure financial policies support the implementation of monetary policy.
"There is no silver bullet to address all the concerns about demand and debt. Rather, fiscal adjustment needs to progress gradually, building on measures that limit damage to demand in the short-term," he said.
The IMF shaved its projections for global economic growth for both this year and next due to sharp government spending cuts in the U.S and the latest struggles of recession-stricken Europe.
They also cut their 2013 forecast for global growth to 3.25 percent, down from its projection in January of 3.5 percent. It also trimmed its 2014 forecast to 4.0 percent from 4.1 percent.
A more subdued outlook for both the United States and the euro zone led the IMF to cut its forecast for advanced economies to 1.2 percent for 2013. It left its 2014 forecast unchanged at 2.2 percent.
The Fund said the U.K. economy will grow by 0.7 percent this year and by 1.5 percent in 2014 – a 0.3 percentage point cut for each year. Together, the combined cut for the two years is greater than any other developed economy, including the US, Italy and Spain.
While the IMF revised down its 2013 forecasts, it also praised the efforts of economic policy makers to defuse the biggest short-term threats to the global recovery, "The threat of a euro area breakup, and a sharp fiscal contraction in the United States caused by a plunge off the 'fiscal cliff'.
The report, which comes as finance ministers and central bankers from around the world gather in Washington for semi-annual meetings of the IMF and the World Bank, also noted that inflation expectations have improved.
While this has given central banks more leeway, the IMF expressed concern about the lack of agreement in the U.S. on tax reforms.
"In the United States, it is worrisome that after three years of deliberations, policymakers have not agreed on a credible plan for entitlement and tax reform, and that improvement in near-term prospects seems to have come with a decreased sense of urgency for progress,"the report writers said.
Japan was the only developed economy to come out with a good prognosis from the IMF. It said that the country, which has been mired in recession for much of the last 20 years, would see growth both this year and next, of 1.4 percent and 1.6 percent respectively.
In the euro zone, the IMF noted that companies and households are still struggling due to "hobbled" banks that are constraining credit supplies.
However, the IMF said complaints about competitive exchange rate depreciations are overblown.
"At this juncture, there seem to be no large deviations of the major currencies from medium-term fundamentals. The U.S.dollar and the euro appear moderately overvalued and the Renminbi moderately undervalued. The evidence on valuation of the yen is mixed," they said.
The authors added that countries with substantial external surpluses should let their exchange rates be more market-driven,and should implement structural policies to rebalance their economies toward consumption-driven growth.
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"In advanced economies, activity is expected to gradually accelerate, starting in the second half of 2013. Private demand appears increasingly robust in the United States but still very sluggish in th eeuro area. In emerging market and developing economies, activity has already picked up steam," the report said.