Sharp drop for economy, IMF warns

Posted: September 20, 2011 in Economic Crisis, US News, World News

Peter Martin
The Sydney Morning Herald
September 20, 2011

THE International Monetary Fund has slashed its economic forecasts for Australia, warning of a new global recession that would hit commodity prices and drive millions worldwide into unemployment.

Hours before the fund published its unexpectedly gloomy update in Washington, the Reserve Bank of Australia released a statement expressing concern about the global outlook and opening the way for interest rate cuts should things deteriorate.

The Australian dollar slid to a five-week low of US102¢ over renewed concerns about Europe after Italy lost its A+ credit rating. Australian shares fell 1 per cent.

The fund says Australia will grow at only 1.8 per cent this year, down from its previously forecast 3 per cent. The figure is way below the May budget forecast and only half the most recent Reserve Bank forecast, suggesting it will be harder than expected to reach the promised budget surplus in 2012-13. For 2012 the fund forecasts 3.3 per cent, down from 3.5 per cent.

But it points out that these are best-case forecasts, made on the assumption that almost everything goes right.

Its best case is for “anaemic” growth in the advanced economies of 1.6 per cent and for global growth of 4 per cent.

“However, this assumes European policymakers contain the crisis in the euro area periphery, that US policymakers strike a judicious balance between support for the economy and medium-term fiscal consolidation, and that volatility in global financial markets does not escalate,” the fund says.

If one or more of its best-case scenarios does not eventuate, the US and much of Europe could slide back into recession, commodity prices could fall “abruptly” and much of the rest of the world would face a repeat of the global financial crisis.

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