IMF warns of a new economic crisis

The International Monetary Fund has urged Eurozone leaders to act swiftly in response to the debt crisis in Greece and Spain, or risk dragging down the global economy with another financial crisis. The IMF has warned that the situation was grave and could escalate into a wider downturn unless national leaders ended their disputes with a long-lasting deal.

As eurozone finance ministers met in Luxembourg for crisis talks and the launch of the euro's permanent rescue fund, the IMF urged Europe and the US to promote growth to help major developing economies like China, Brazil and India.

The Washington-based lender said at the start of its annual meeting, in Tokyo, that the "downside risks are judged to be more elevated than in the April 2012 or September 2011 world economic outlook reports". The annual assessment of the global economic situation said it was not clear whether the situation was another bump in the road to recovery or a worsening of the situation. "The answer depends on whether European and US policymakers deal proactively with their major short term economic problems," it said.

The warning comes against a backdrop of slowing GDP growth across developed countries and much of the developing world as trade dries up and governments increasingly hide behind protectionist barriers. Although Britain was singled out by the IMF as one of the developed nations expected to grow next year, chancellor George Osborne was forced to concede in his speech to the Conservative party conference on Monday that lack of growth in the past two years meant austerity measures could last until as long as 2018.

And the IMF admitted that it, like many other forecasting organizations, had underestimated the negative impact on growth of steep cuts in public spending. It said: "Staff research suggests that fiscal cutbacks had larger than expected negative short-term multiplier effects on output, which may explain some of the output falls."

The World Bank, which is holding its annual meeting alongside the IMF in Tokyo, added to the gloom with a report that warned of cuts in growth across the developing world. Stock markets tumbled as the prospects for growth was trimmed by the bank, which mainly lends to cash-strapped poorer countries.

The global economy will grow at 3.3% this year and 3.6% next year, the IMF said, down 0.2 and 0.3 points respectively from forecasts earlier this year. The UK is expected to suffer a 0.4% reduction in national income this year before recovering to 1.1% next year. Only two years ago, world output was 5.1% and the recovery from the 2008 crash seemed under way.


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