IMF Reckons Global Economy Will Grow — Gradually

The IMF’s chief economist, Olivier Blanchard, put it this way:

We have moved from a two-speed recovery to a three-speed recovery. Emerging market and developing economies are still going strong, but in advanced economies, there appears to be a growing bifurcation between the United States on the one hand and the euro area on the other.

What the IMF calls a “larger-than-expected fiscal adjustment” (read, “sequester”) is expected to keep U.S. gross domestic product (GDP) growth at around 2% in 2013.

Weak as that is, eurozone GDP is expected to contract by 0.25%. The IMF says that eurozone credit channels are “broken” and that improved financial conditions are not being passed through to households and businesses because banks are barely profitable and have low capital. The fund also takes a swipe at the eurozone penchant for austerity.

If it weren’t for emerging markets, the global economy would really be sunk. The IMF forecasts growth of around 5.25% in 2013, rising to 5.75% in 2014 for emerging nations’ GDP.

Another bright spot, according to the IMF, is Japan, where a massive new asset purchasing program is expected to push GDP growth to 1.5% in 2013.

The IMF also noted that short-term risks to the U.S. and eurozone economies have moderated somewhat, but medium-term risks remain tilted toward the downside. The concerns include lack of “strong fiscal consolidation plans” in the United States and Japan, high private sector debt, limited policy actions and the threat of continuing low growth in Europe due to “insufficient institutional progress” (read, “insistence on austerity in the face of all evidence that it has not worked”).

The IMF press release and link to the WEO are available here.