Slashes India’s growth forecast by 1.8 percentage points to 3.8 per cent

The International Monetary Fund, on Tuesday, cut its global economic growth forecasts, and warned that the U.S. would harm the world economy if it failed to raise its borrowing limit.

The international lending agency said the global economy would grow 2.9 per cent this year and 3.6 per cent in 2014. Both are 0.2 percentage point 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 per cent and next year to 2.6 per cent. Those are 0.1 percentage point and 0.2 percentage point lower than in July, respectively.

The fund’s forecasts assume the U.S. partial government shutdown would 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 October 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, fuelled by a housing rebound, rising stock prices, and a greater willingness by banks to lend.

“Unless there are fiscal accidents, the recovery should continue,” Mr. 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 per cent in 2014, after shrinking 0.4 percent this year. 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 per cent this year and 1.1 percentage points to 5.1 per cent in 2014.

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