The International Monetary Fund has sharply downgraded its outlook for the US economy through 2012 because of weak growth and concern that Europe won't be able to solve its debt crisis.
The international lending organization expects the US economy to grow just 1.5 per cent this year and 1.8 per cent in 2012. That's down from its June forecast of 2.5 per cent in 2011 and 2.7 per cent next year.
The IMF has also lowered its outlook for the 17 countries that use the euro. It predicts 1.6 per cent growth this year and 1.1 per cent next year, down from its June projections of 2 per cent and 1.7 per cent, respectively.
The gloomier forecast for Europe is based on worries that Greece will default on its debt and destabilize the region.
"Fear of the unknown is high," said Olivier Blanchard, the IMF's chief economist. "Strong policies are urgently needed to improve the outlook and reduce the risks."
Overall, the IMF predicts global growth of 4 per cent for both years. Stronger growth in China, India, Brazil and other developing countries should offset weaker output in the United States and Europe.
The US economy grew at an annual rate of just 0.7 per cent in the first six months of the year. And the US unemployment rate has stayed above 9 per cent for all but two months since the recession officially ended two years ago.
Financial turmoil and slow growth are feeding on each other in both the United States and Europe, IMF officials say. Europe's debt crisis is causing banks to reduce lending and hold onto cash. Sharp stock market drops in the United States over the summer have hurt consumer and business confidence and will likely reduce spending. That slows growth, which leads many investors to shift money out of stocks and into safer investments, such as Treasury bonds. In Europe, slower growth will make it harder for stressed nations to get their debt under control.
US and European policymakers need to act more decisively to cut budget deficits, the IMF said. And European officials need to ensure that the region's banks have enough capital to withstand the debt crisis.
The IMF said in its report that the US economy faces longer-lasting problems that go beyond high gas prices and disruptions caused by the Japan crisis.
Employers are adding few jobs and giving out meager pay raises. Many homeowners owe more on their mortgages than their homes are worth. Banks are keeping credit tight.
All those trends are holding back consumer spending. Unemployment is likely to average 9 per cent next year, the IMF's report said, echoing a recent estimate by the Obama administration.
President Barack Obama's proposal to cut taxes and spend more on infrastructure should provide much-needed short-term stimulus, the IMF said. But it needs to be paired with a longer-term plan to reduce the deficit over, the report said. The timing of the budget cuts is key, Blanchard said.
Budget cuts "cannot be too fast or it will kill growth," Blanchard said in a statement. "It cannot be too slow or it will kill credibility."
The 187-member nation fund conducts economic analysis and lends money to countries in financial distress. It will hold its annual meetings with the World Bank later this week in Washington.
Social unrest, oil prices pressure Mena
The International Monetary Fund said Tuesday that social unrest and oil prices fluctuations were causing large uncertainties in the economies of the Middle East and North Africa.
It slightly cut its growth forecast for the region by 0.1 percentage point to 4.0 per cent, in its quarterly World Economic Outlook.
"Commodity price movements and social unrest continue to shape the region's experience and prospects," the IMF said .
"The short-term outlook is still subject to unusually large uncertainties, stemming mainly from the fluid political and security situation in some Mena economies as well as growing uncertainty about external demand," it said.
The Mena region covered by the IMF report stretches from Iran to Mauritania. The current report, however, has excluded oil-rich Libya due to insufficient data.
The report also did not provide separate figures on Yemen, the impoverished nation hit since January by ongoing protests demanding the ouster of President Ali Abdullah Saleh.
The IMF forecasts growth in oil-exporting countries, including Iran, to reach five per cent this year and drop slightly to about four per cent in 2012, as uncertainty over the global economy prevails.
Qatar will continue to lead the economic expansion in this category on the back of its growing natural gas exports, as well as Iraq and Saudi Arabia.
However, growth in Qatar this year has been slightly revised down from 20 per cent forecast in April to 18.7 per cent. The pace of expansion in the tiny energy-rich Gulf state is expected to narrow sharply to 6.0 per cent in 2012.
The forecast for Saudi Arabia's economic growth in 2011 has also been cut from 7.5 per cent forecast in April to 6.5 per cent. The largest Arab economy is expected to grow by 3.6 per cent next year.
Oil importers, mainly those hit by a wave of pro-democracy uprisings over the past months, will continue to have a subdued outlook, the IMF said. It put overall growth forecast for this category at 1.4 per cent this year, down from 4.5 per cent in 2010.
"Activity in a few economies will be constrained by domestic social unrest and an associated slow recovery in tourism receipts and remittances," it said.
The IMF expected, however, growth for oil-importing countries to increase to 2.5 per cent next year, "underpinned by a slow recovery in investment."
The IMF slightly raised its forecast for Egypt's growth this year to 1.2 per cent from 1.0 per cent forecast in April. The economy of the most populated Arab country is expected to grow by 1.8 per cent next year.
The Tunisian economy will not grow at all this year, according to the IMF.
But the North African nation, which triggered in December a wave of Arab protests in what became known as the "Arab Spring," and ousted president Zine El-Abedine bin Ali, should see its economy expanding by 3.9 per cent next year, compared to 3.1 per cent in 2010, the IMF said.
Meanwhile, the economy of Syria, hit by European sanctions and a wave of pro-democracy uprising that has left at least 2,600 dead, will contract by 2.0 per cent this year, the IMF said.
Syria had posted growth of 3.2 per cent in 2010, but protests that erupted in February against the regime of President Bashar al-Assad have triggered international pressure, and deprived the country of a vital inflow of tourists.
The Fund said the outlook for the whole Mena region was "subject to large downside risks."
"External risks relate to the unfolding weaker outlook in the United States and Europe, which could sharply depress activity and hence commodity prices or further slow external financing flows to the region," it said.
"However, most risks pertain to continued domestic instability, compounded by intraregional contagion. The political turmoil has seen risk premiums rise and private financing and tourism receipts fall; not only in those economies directly affected by the turmoil but throughout the region," it added.
In other oil-exporting Mena countries, the IMF expected growth this year to be at 3.3 per cent in the United Arab Emirates, 5.7 per cent in Kuwait, 9.6 per cent in Iraq, 2.5 per cent in Iran, and 2.9 per cent in Algeria. Sudan's GDP is seen contracting by 0.2 per cent, excluding South Sudan, which became independent this year.
As for oil-importing states, the IMF expected this year a growth of 4.6 per cent in Morocco, 1.5 per cent in Lebanon and 2.5 per cent in Jordan.