The International Monetary Fund (IMF) warned global economic recovery would be “weak and bumpy” and said the global economy was slowing on Tuesday, as it slashed its growth forecast to 4 percent for both 2011 and 2012.
The latest forecast means the IMF has slashed global growth forecasts by over 1 percent this year, with the Fund warning the global economy is “in a dangerous new phase.”
“Global activity has weakened and become more uneven, confidence has fallen sharply recently, and downside risks are growing,” the IMF said in its September 2011 World Economic Outlook (WEO).
The IMF shaved its forecasts for US growth to 1.5 percent for 2011 and 1.8 percent for 2012, down from June projection of 2.5 percent and 2.7 percent, respectively
The report also called for strong and coordinated action to avert a decade of lost growth in the advanced economies.
“Strong policies are urgently needed to improve the outlook and to reduce the risks,” IMF chief economist Olivier Blanchard said.
“Only if governments move decisively on fiscal policy, financial repairs, and external rebalancing, can we hope for stronger and more robust recovery.”
Real GDP is expected to grow by a fairly robust 6.4 percent in emerging and developing economies but by only 1.6 percent in advanced economies in 2011.
The IMF warned however that its forecast rested on several assumptions including that European policymakers would be able to contain the euro zone debt crisis and that US policymakers would be able to “strike a judicious balance between support for the economy and medium-term fiscal consolidation.”
The forecast also relies on the assumption that further disruptions in global financial markets such as the volatility seen in August do not worsen.
“If the assumptions are not met, global growth will be much lower,” the IMF report warned.
Blanchard, speaking at the launch of the report, also warned European leaders to come to a solution to the euro zone debt crisis adding; “There is a wide perception that policymakers are one step behind the action, markets. Europe must get its act together.”
Peter Dixon, economist at Commerzbank, told CNBC.com that while the World Economic Outlook for September did not suggest anything new, the IMF did appear to be warning policymakers that fiscal tightening on its own would not be enough to prevent recession and may even cause it.
“The global economy is slowing down. So maybe the message is getting through that we don’t need more fiscal tightening right now. The smart people don’t want to repeat the mistakes of history and when you have an economy where we a entering as the IMF put it themselves a dangerous new phase, the last thing the world needs is more fiscal tightening,” Dixon said.
“Politicians are looking at the medium term but in a sense no one really cares about the medium term right now they care about the near term and if they continue cutting in the way they are then we may well slip back into recession,” he added. “Now things have changed globally there has to be a plan B. All governments need a plan B now.”
However, another IMF official said Britain and Germany would not need to shift their fiscal policy stance as long as the Fund's economic forecasts pan out. UK GDP growth was slashed from 1.7 percent to 1.1 percent in 2011 by the IMF.
The fund also cut its growth forecast for the 17-nation euro zone by nearly half a percentage point to 1.6 percent in 2011 and even weaker conditions are seen for next year with growth of just 1.1 percent. Currently the single currency region is scarcely growing at a 0.25 percent annual rate.
“Welcome to the wrong end of the swimming pool,” Justin Urquhart-Stewart, co-founder of Severn Investment Management, told CNBC.com. “There is no such thing as a V shaped recovery. This goes along flat for a while and then very very slowly the recovery will begin. This has got a very long tail to it.”
“This is the IMF saying: ‘All hands to the pumps guys’. This doesn’t have to be a 1930s recession we didn’t have China and Japan in the world economy because they were too busy fighting each other, We didn‘t have India in the world economy because it was part of the British Empire, so this is a very different situation,” he added.
But Urquhart-Stewart said that the inability to find any tangible growth meant governments could not afford to continue cutting spending. “You are going to have to pull a few more levers to stimulate the economy and get growth going. That’s the only way to restore confidence. You do that by more targeted government investment,” he added.
The publication of the report comes a day after US president Barrack Obama launched a $2.3 trillion proposal to cut the budget deficitover the next decade. The proposals were immediately attacked by Republican Congressmen, who warned they had no chance of becoming law and amounted to class warfare.
The report also came after Standard & Poor’s rating agency cut Italy’s credit rating by one notch and maintained its negative outlook for the euro zone's third largest economy.