Global Economy Could Get Worse on Europe Debt Crisis

International Monetary Fund chief Christine Lagarde Friday warned the global economy was slowing and said the situation could get worse because Europe was not doing enough to fix its debt crisis. Lagarde said the IMF would cut its growth forecast in its global outlook to be released later this month. "What I can tell you is that it will be tilted to the downside and certainly lower than the forecast that was published three months ago," she told an economic forum in Tokyo during a week-long Asian tour. "And that is predicated on the right set of actions being taken in Europe in order to avoid very significant deterioration and to eliminate major threats." In April, the IMF hiked its global growth forecasts to an annual rate of 3.5 per cent this year, accelerating to 4.1 per cent in 2013, up from the January forecast of 3.3 per cent and 4.0 per cent respectively.

Lagarde declined to elaborate on the IMF's new assessment due later this month, but said conditions since the last forecast had "regrettably" become "more worrisome", although she hailed recent steps to tackle Europe's woes. The IMF chief cited measures adopted after a European leaders' meeting in Brussels last week and the European Central Bank's move on Thursday to cut interest rates to historic lows as proof of progress. Stimulus measures and emergency aid to troubled Italy and Spain were "significant steps in the right direction", Lagarde said. But "from the IMF perspective, we believe that more needs to be done in order to really complete the architectural job of the Eurozone: a monetary union, a banking union followed by a fiscal union". "It's also a question of implementation -- diligent, rigorous, steady implementation," Lagarde added. On Thursday, central banks in Europe and China ushered in easing and stimulus moves in a bid to help power the global economy, just days after the IMF pared its growth forecast for the US economy.

The Washington-based organisation estimated 2012 US economic growth at 2.0 per cent, down from an April forecast of a 2.1 per cent expansion for the world's biggest economy -- and warned that the Obama administration may be slicing the deficit too fast for the weak economy. Lagarde's comments came a day after Beijing's second interest rate cut in less than a month surprised markets and stoked worries about the world's second-biggest economy. Then, the European Central Bank cut its main interest rate to a record low 0.75 per cent, while the Bank of England kept its rate even but announced £50 billion ($78 billion) in additional stimulus. However, the moves failed to impress investors with Asian markets falling into negative territory on Friday, while the euro took a hit. Lagarde said Asia had been "ahead of the curve" on banking reform, but warned that the global financial system remained fragile. She also acknowledged that the yen was "moderately overvalued" after Prime Minister Yoshihiko Noda told her earlier Friday that Japan's economy was "suffering a serious, adverse impact" over the currency's strength.

The Japanese unit hit record highs against the dollar last year, and remains strong as traders seek out a safe-haven currency amid worries about the euro and greenback. But the strong currency hurts Japan's export-oriented economy, already struggling after last year's quake-tsunami disasters, by making products pricier overseas while shrinking the value of repatriated foreign earnings. Lagarde will be in Jakarta on July 8-10, and in Bangkok on July 11-12, where she will participate in a seminar organised by the IMF, the Bank of Thailand and the Asian Development Bank.