Market Overview

IMF Says World Economy is Kind of Screwed

I hope you've got lots of canned goods, bottled water, and somewhere safe to hide from the zombies.

According to the International Monetary Fund, the world economy has entered a new phase and its outcomes are rather uncertain.

"The global economy has entered a dangerous new phase," said Olivier Blanchard, the IMF's chief economist. "The recovery has weakened considerably. Strong policies are needed to improve the outlook and reduce the risks."

The IMF has downgraded the growth prospects of the United States and countries in the Eurozone. For the United States, the IMF now predicts a 1.5 percent increase this year and only 1.8 percent next year, down significantly from the June forecast of 2.5 and 2.7 percent, respectively.

It's not even guaranteed that the United States will hit its lowered target, as growth in America has dwindled down to 0.7 percent so far in 2011. We will need a gangbusters Christmas season to push the numbers higher.

As for Europe, they're not in any better shape for growth, and have far bigger problems than just a slow growth rate. The IMF sees a growth rate of 1.6 percent this year and 1.1 percent for next year, inverting the upward slope that it expects from America over the next 24 months. These numbers are down from the 2 percent and 1.7 percent rates the IMF had been predicting.

"Markets have clearly become more skeptical about the ability of many countries to stabilize their public debt," Blanchard said. "Fear of the unknown is high."

Unknown is almost too kind of a word. At this point, no one is quite sure how the sovereign debt situation in Europe will play out. Greece threatens to collapse any day, only to be propped up by one commitment or another from a foreign nation.

A collapse in any of the economies of Europe, even the smaller ones like Greece, could crush the euro and end in a full-scale dissolution of the politico-economic ties of the region. Nations would likely return to their former national currencies, and bankers would lose a ton of money. So...it wouldn't be a total loss.

The key for the United States the next two years will be the success of President Obama's jobs package. If it passes, it will rebound the economy, according to the IMF. If it fails, well, all bets are off at that point.

According to the IMF, the plan needs to be implemented carefully, so that the stimulus portions come first, boosting the economy. The debt portions of the plan, which pay for the entirety of the stimulus package, would have to be phased in after the economy begins moving along again.

Budget cuts "cannot be too fast or it will kill growth," Blanchard said in a statement. "It cannot be too slow or it will kill credibility."

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Posted-In: News Movers & Shakers Politics Global Econ #s Economics Markets General Best of Benzinga

 

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