1 of 10. International Monetary Fund's Economic Counsellor and Director of Research Department Olivier Blanchard (2nd R), Deputy Director Jorg Decressin (2nd L), Division Chief Thomas Heibling (R) and Senior Press Officer Gita Bhatt hold a news briefing on the World Economic Outlook (WEO), at the Tokyo International Forum in Tokyo October 9, 2012. The IMF said the global economic slowdown is worsening as it cut its growth forecasts for the second time since April and warned U.S. and European policymakers that failure to fix their economic ills would prolong the slump.

TOKYO | Tue Oct 9, 2012 9:02am EDT

TOKYO (Reuters) - The IMF said the global economic slowdown is worsening as it cut its growth forecasts for the second time since April and warned U.S. and European policymakers that failure to fix their economic ills would prolong the slump.

Global growth in advanced economies is too weak to bring down unemployment and what little momentum exists is coming primarily from central banks, the International Monetary Fund said in its World Economic Outlook, released ahead of its twice-yearly meeting, which will be held in Tokyo later this week.

"A key issue is whether the global economy is just hitting another bout of turbulence in what was always expected to be a slow and bumpy recovery or whether the current slowdown has a more lasting component," it said.

"The answer depends on whether European and U.S. policymakers deal proactively with their major short-term economic challenges."

Ahead of the Tokyo meeting, policymakers have flagged the U.S. "fiscal cliff" -- government spending cuts and tax raises due to take affect early in 2013 -- and resolving the euro area's debt crisis as the top issues facing the global economy.

U.S. Treasury Secretary Timothy Geithner said on Tuesday that reforms in Europe "could take years to bear fruit".

"In these periods of time, where people were very worried about the risk of collapse in Europe, you saw an impact on financial markets and confidence that was very, very substantial," he told a meeting of Indian and U.S. business leaders in New Delhi. "Europe still has a very hard road ahead of them."

His comments echoed those of Canadian Finance Minister Jim Flaherty, who last week said Europe's debt crisis was "a clear and present danger".

The IMF forecast in its latest health check on the world economy that global output in 2012 would grow just 3.3 percent, down from a July estimate of 3.5 percent.

That would make this the slowest year of growth since 2009 when the world was struggling to pull out of the global financial crisis. It predicted only a modest pickup next year to 3.6 percent, below its July estimate of 3.9 percent.

It projected U.S. growth would be a little more than 2 percent this year and next, but forecast a contraction in the euro area this year by 0.4 percent and modest growth in 2013 of 0.2 percent.

Emerging markets are still expected to grow four times as fast as advanced economies, but the IMF took a sharp knife to its estimates for India and Brazil, with the latter now seen growing slower than the United States this year.

It also cut its expectations for China in 2012 and 2013 but warned against being overly pessimistic about the prospects of these economies, which were major engines of growth in the global financial crisis.

"Let me be clear. We do not see these developments as signs of a hard landing in any of these countries," IMF Chief Economist Olivier Blanchard said at a briefing, referring to China, India and Brazil.

MORE AT WORK

The IMF said "familiar" forces were dragging down advanced economy growth: fiscal consolidation and a still-weak financial system, the same problems that have plagued the world since the global financial crisis exploded in 2008.

"More seems to be at work, however, than these mechanical forces - namely, a general feeling of uncertainty," Blanchard said in a commentary on the forecasts.

Measures of risk and uncertainty, such as the VIX volatility gauge in the United States, remain at low levels, Blanchard pointed out, which makes it difficult to assess the nature of the uncertainty.

"Worries about the ability of European policymakers to control the euro crisis and worries about the failure to date of U.S. policymakers to agree on a fiscal plan surely play an important role, but one that is hard to nail down," Blanchard said.

Geithner, who was speaking at an India-U.S. business forum in New Delhi, said he was "relatively confident" that Washington can manage its fiscal challenges.

"Now we're growing close to potential but if you look through those factors, it's a little more encouraging than you might think," he said. "We are now in a much stronger position than what is true for any other major developed economy."

Concerns about the health of the global economy and corporate earnings prospects have weighed on financial markets. World shares as measured by the MSCI world equity index .MIWD00000PUS fell 0.7 percent on Monday. The index was flat in Asia on Tuesday.

S&P 500 earnings for the third quarter are forecast to have fallen more than 2 percent from the year-earlier period, which would be the first decline in three years, Thomson Reuters data shows.

The IMF said financial conditions are likely to remain "very fragile" over the near term because repairing euro zone problems will take time and there are concerns about how the U.S. economy will cope with the expected spending cuts and tax increases.

The "urgent policy priorities" for the United States should include avoiding the fiscal cliff, which the IMF said at the extreme would amount to a fiscal withdrawal of more than 4 percent of GDP in 2013, and economic growth would stall.

"Both sides of the political isle (should) signal that they are willing to compromise and that they're willing to get this done ... that could help lower the level of uncertainty that is affecting U.S. investors and consumers," IMF First Deputy Managing Director David Lipton told Reuters in an interview on Monday.

Resolving the euro area crisis would require progress in adopting and implementing the various measures discussed, including banking and fiscal union, the IMF report said.

"If the complex puzzle can be rapidly completed, one can reasonably hope that the worst might be behind us," Blanchard said.

Euro zone finance ministers on Monday unveiled the European Stability Mechanism (ESM), a 500 billion euro rescue mechanism for lending to distressed economies in the 17-country bloc.

But perhaps the biggest contagion risk for the region is Spain, which a British finance ministry source suggested will be the top issue for finance ministers in Tokyo.

"We have always been very clear that the euro zone needs to take significant action," the source said.

The euro zone has already set aside 100 billion euros for Spain to recapitalize its banks but financial markets believe a government bailout will follow in coming weeks or months.

(Additional reporting by Anna Yukhananov in TOKYO, David Milliken in LONDON and Manoj Kumar and Rajesh Kumar Singh in NEW DELHI; Editing by Neil Fullick, Alex Richardson and Ron Popeski)

(This story corrects quote by Geithner in 7th paragraph)

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Worker Derrick Williams loads material into a cutting machine at a Wrap-Tite manufacturing facility in Solon, Ohio July 13, 2012.

WASHINGTON | Thu Sep 27, 2012 2:29pm EDT

WASHINGTON (Reuters) - Orders for long-lasting U.S. manufactured goods fell sharply in August, suggesting the main engine of the economic recovery was stalling even as a report showing a drop in new claims for jobless aid offered a hopeful sign on the labor market.

While weak demand for aircraft and automobiles accounted for much of the drop in orders last month, the Commerce Department report on Thursday underscored the damage being inflicted by the uncertainty over U.S. fiscal policy, Europe's debt troubles and a slowdown in China.

"Given the uncertainty associated with the fiscal cliff, there is certainly a wait-and-see attitude which is impacting a lot of the data," said Omair Sharif, an economist at RBS in Stamford, Connecticut.

The so-called fiscal cliff refers to the $500 billion or so in expiring tax cuts and government spending reductions set to take hold in 2013 if the U.S. Congress fails to agree on an orderly way to reduce a huge budget deficit.

The Commerce Department said durable goods orders dived 13.2 percent, the largest drop since January 2009, when the economy was in the throes of a recession. The decline primarily reflected weak demand for aircraft and automobiles, and transportation orders fell 34.9 percent. Plane maker Boeing reported only one aircraft order last month versus 260 in July.

But orders were down for a wide range of goods, and even excluding transportation, orders fell 1.6 percent, dropping for a third consecutive month. The fall was in sync with other data indicating a marked cooling in the production side of the economy.

Economists polled by Reuters had expected orders for durable goods -- items from toasters to aircraft that are meant to last at least three years -- to fall 5 percent, with non-transportation orders rising marginally.

Unfilled orders dropped by the most since December 2009, pointing to weak factory activity in the months ahead.

"The thesis that manufacturing activity is likely to struggle for the remainder of the year continues to build," said John Ryding, chief economist at RDQ Economics in New York.

Underscoring the economy's weakness, the government revised its measure of second-quarter growth to just a 1.3 percent annual pace from 1.7 percent, largely to reflect the impact a drought in the Midwest had on farm inventories.

Inventories lopped off almost half a percentage point from GDP growth in the last quarter. However, economists expected this to reverse in the third quarter.

Durable goods inventories set a fresh record high in August, prompting economists at Macroeconomic Advisers to raise their third-quarter GDP growth estimate by one-tenth of a percentage point to 1.8 percent.

There was also bad news on the housing market, which has been one of the economy's relative bright spots. Contracts to buy previously owned homes fell in August, providing a counterpoint to other recent data that have shown activity in the housing market picking up, a separate report showed.

However, not all the news on Thursday was downbeat.

The Labor Department showed the number of Americans filing new claims for jobless benefits fell 26,000 last week to a two-month low of 359,000. The four-week moving average for new claims, a better measure of labor market trends fell for the first time after five weeks of increases.

Investors on Wall Street shrugged off the mixed economic data and bought stocks after five straight days of losses. U.S. Treasury debt prices fell on profit-taking after recent gains, while the dollar was little changed versus a currency basket.

ANXIETY OVER FISCAL POLICY

Despite the drop in claims last week, labor market weakness was expected to persist for a while because of anxiety over higher taxes and deep government spending cuts in January and slowing global growth, economists said.

Sluggish job gains and stubbornly high unemployment spurred the Federal Reserve this month into launching a third round of bond purchases to drive down already low interest rates.

The U.S. central bank vowed to buy $40 billion worth of mortgage-backed securities each month until it sees a sustained upturn in the labor market.

"Today's reports suggest that the Fed is going to remain very accommodative for quite some time to try and spur demand and job growth," said Sam Bullard, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.

Mortgage finance company Freddie Mac said the mortgage-backed securities purchases helped push the average rate on a 30-year fixed rate mortgage down to a record low of 3.40 percent this week.

In a preliminary estimate of an upcoming annual revision to its main employment measures, the Labor Department said it likely undercounted job growth in the 12 months through March by 386,000.

The encouraging news on the labor market was eclipsed by the weak durable goods report.

Orders for non-defense capital goods excluding aircraft, a proxy for business spending plans, rose 1.1 percent in August, only partly reversing a 5.2 percent slide the prior month.

What's more, shipments of these goods, which are used to calculate equipment and software spending in the GDP report, fell for a second straight month. That implies little or no growth in equipment and software investment this quarter.

(Additional reporting by Rachelle Younglai; Editing by Andrea Ricci and Tim Ahmann)

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