Global growth forecast cut as Lagarde calls on leaders to ‘save’ recovery

ANALYSTS will today downgrade their forecasts for world economic growth and predict “sluggish” expansion until 2015 amid calls by the new head of the International Monetary Fund (IMF) for politicians to “act now” to save the global recovery.

The world economy will grow by just 3 per cent this year, according to the Centre for Economic & Business Research (CEBR), down from last year’s 4.2 per cent rise and less than the think tank’s previous forecast, made in May, of 3.5 per cent.

This summer’s sovereign debt crises on both sides of the Atlantic and ensuing stock market turmoil have prompted the body to slice its growth predictions, with lower demand expected to trigger a “softening” of oil and commodity prices.

Douglas McWilliams, CEBR’s chief executive, warned: “The sluggish growth that we forecast is likely to mean persistent, high unemployment in the developed economies.

“The silver lining to this cloud is that the prices of oil and other commodities are likely to be relatively weak for the next five years, putting less downward pressure on living standards than in the past two years.”

McWilliams added that “the bearish growth forecast will put pressure on the euro”, with CEBR cutting its prediction for growth in Germany – Europe’s powerhouse economy – from 2.3 per cent to 1.9 per cent.

The predictions came as Italy and Spain prepare to tap the bond markets this week for more cash – up to €18 billion (about £15.7bn) – with any problems likely to trigger further stock market volatility.

But Klaus Regling, head of the European Financial Stability Facility (EFSF), yesterday said that the continent could conquer its debt problems within three years if countries continue to reform their budgets.

Regling told German magazine Der Spiegel: “There is good reason to hope that the crisis is over in two to three years’ time.”

He also scolded Germans for being too pessimistic about the economic outlook for the eurozone and dismissed the idea that the single currency would break apart, adding: “The risk that the euro is discarded, from whatever quarter, is zero.”

Regling’s comments followed remarks made late on Saturday night by IMF managing director Christine Lagarde calling on politicians to address the sovereign debt crises in order to save the global economic recovery.

Lagarde said: “Put simply, macroeconomic policies must support growth. Monetary policy should remain highly accommodative, as the risk of recession outweighs the risk of inflation.”

Her comments chimed with those from economists at investment bank Citi, who said the Bank of England should embark on more quantitative easing – or money printing – before the end of the year to stimulate the UK’s flagging economy.

Meanwhile, French finance minister François Baroin yesterday said he wants concrete results for a controversial international tax on financial transactions at November’s G20 summit. European banks have poured scorn on the idea of a so-called “Tobin tax”, saying it would not stabilise markets.