The International Monetary Fund on Wednesday cut its global economic growth forecasts and warned that the U.S. would harm the world economy if it fails to raise its borrowing limit.
The international lending agency said the global economy will grow 2.9 percent this year and 3.6 percent in 2014. Both are 0.2 percentage points lower than the group’s July forecasts. The main reason for the downgrade was slower growth in China, India, Brazil and other developing countries.
But the IMF also lowered its outlook for U.S. economic growth this year to 1.6 percent and next year to 2.6 percent. Those are 0.1 and 0.2 percentage points lower than in July, respectively.
The Fund’s forecasts assume the U.S. partial government shutdown will last only a short period. But it warned that failure to raise the U.S. government’s borrowing limit later this month could lead to a default on U.S. debt. That would push up interest rates, disrupt global financial markets and possibly push the U.S economy back into recession.
“Failure to lift the debt ceiling would be a major event,” Olivier Blanchard, the IMF’s chief economist, said at a news conference.
U.S. Treasury officials say the government would quickly run out of cash and could default on its obligations if Congress doesn’t approve an increase in the borrowing limit by Oct. 17. U.S. Treasury bonds are a key part of the international financial system, and a default would have global repercussions. For that reason, many analysts expect the borrowing limit will probably be increased on time.
The IMF’s projections for the U.S. economy are slightly below many private-sector forecasts. The group expects growth to increase next year because government spending cuts and tax increases, which took effect earlier this year, won’t drag nearly as much.
The U.S. is benefiting from steady consumer and business spending, the IMF said, fueled by a housing rebound, rising stock prices and a greater willingness by banks to lend.
“Unless there are fiscal accidents, the recovery should continue,” Blanchard said.
Europe’s economy is also benefiting as government spending cuts and tax increases ease. The IMF forecasts the 17 nations that use the euro currency will expand 1 percent in 2014, after shrinking 0.4 percent this year. Those estimates are mostly unchanged from July.
Many developing countries, particularly India, have been hurt by expectations that the Federal Reserve will soon slow its $85-billion-a-month in bond purchases. That’s caused investors to pull money from India, Brazil and other emerging markets as yields on U.S. assets picked up.
The Fund slashed its forecast for India’s growth 1.8 percentage points to 3.8 percent this year, and 1.1 percentage points to 5.1 percent in 2014. It projects that Brazil’s economy will expand 2.5 percent this year, the same forecast as July. But it no longer expects growth to accelerate in 2014. It now expects 2.5 percent growth next year, or 0.7 percentage points lower than its previous forecast.
India’s central bank has raised interest rates in an effort to stem the flow of money leaving the country, a move that has also slowed growth.
Brazil’s economy has been hampered by poor infrastructure and high inflation. That has forced its central bank to also raise interest rates.
The IMF called on the Fed to clearly communicate its plans as it moves toward scaling back the bond purchases. But at the same time, it said the Fed should continue its efforts to stimulate the economy.
“It is time to make plans to exit (bond purchases) and zero interest rates, though it is not yet time to implement those plans,” Blanchard said.