International Monetary Fund Deputy Managing Director David Lipton said the world faces the danger of a renewed downturn if officials in the U.S. and Europe don’t succeed in “careful policy steering” to avoid that outcome.
The Washington-based fund’s forecast for global growth of 3.6 percent next year depends on euro-area policies being implemented decisively to restore confidence, and U.S. lawmakers avoiding the so-called “fiscal cliff” and raising the nation’s debt ceiling, Lipton said at Chatham House in London today.
“Absent such actions, the world could slide into another downturn, with deep recession in the euro area periphery, and contraction or stagnation in the core and other advanced economies,” he said. “This requires very careful policy steering.”
The twin threats stem from the persisting crisis in the euro region, which has raged for three years, and $607 billion in tax increases and spending cuts in the U.S. that will take effect starting in January if lawmakers don’t agree on a compromise.
“In the United States, if timely action is not taken to avoid the fiscal cliff and raise the debt ceiling, fiscal policy could tighten by over 4 percent of GDP in 2013, pushing the country into a recession with large international spillovers,” Lipton said. “The lack of a strong medium-term fiscal adjustment plan also weighs on business confidence.”
Lipton said that in the euro zone, policy makers also have their work cut out for them.
“In the euro area, implementation challenges remain large and future EMU architecture is still taking shape, with the roadmap toward a banking union and greater fiscal integration yet to be fully agreed,” he said.
Lipton also said that fiscal disagreements in Japan also present a further complication for the world economy.
“Political impasse over budget funding and the lack of a sufficiently strong medium-term fiscal adjustment plan (notwithstanding the recent approval of a timetable for consumption tax increase) also contribute to uncertainty,” he said.