OTTAWA – The International Monetary Fund is downgrading prospects for Canada and other advanced countries as the global economy enters a dangerous new phase.
The IMF’s new outlook says Canada’s economy will remain positive but this year’s growth rate will be 2.1 per cent, falling to 1.9 per cent next year.
That down from previous forecasts and the official Bank of Canada expectations.
The IMF also projects Canada’s unemployment rate will rise from the current 7.3 per cent to the mid-seven per cent range and above.
It says the overall global economy will grow four per cent this year and next year — down from 5.1 per cent last year.
The IMF is not predicting a global recession but it is warning that risks of a downturn have dramatically worsened in the past few months.
The international lending organization has sharply downgraded its economic outlook for the United States and Europe through the end of next year.
The IMF expects the U.S. economy to grow just 1.5 per cent this year and 1.8 per cent in 2012. That’s down from its June forecast of 2.5 per cent in 2011 and 2.7 per cent next year.
To achieve even that still-low level of growth, the U.S. economy would need to expand at a much faster rate in the second half of the year than its 0.7 per cent annual pace in the first six months.
Most economists expect U.S. growth of between 1.5 per cent and 2 per cent in the final two quarters. Though an improvement, it wouldn’t be enough to lower the U.S. unemployment rate. The rate has been nine per cent or higher in all but two months since the recession officially ended more than two years ago.
“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 also lowered its outlook for the 17 countries that use the euro. It predicts 1.6 per cent growth this year and 1.1 per cent next year, down from its June projections of 2 per cent and 1.7 per cent, respectively.
The gloomier forecast for Europe is based on worries that euro nations won’t be able to contain their debt crisis and keep it from destabilizing the region.
“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.”
Overall, the IMF predicts global growth of four per cent for both years. Stronger growth in China, India, Brazil and other developing countries should offset weaker output in the United States and Europe.
Financial turmoil and slow growth are feeding on each other in both the United States and Europe, IMF officials say. Europe’s debt crisis is causing banks to reduce lending and hold onto cash. Sharp stock market drops in the United States over the summer have hurt consumer and business confidence and will likely reduce spending. That slows growth, which leads many investors to shift money out of stocks and into safer investments, such as Treasury bonds.
Associated Press Writers Christopher S. Rugaber and Gabriele Steinhauser contributed to this report.