IMF cuts US growth forecast; warns west they are 'playing with fire' on debt

The International Monetary Fund has cut its growth forecast for the US this year from 2.8% to 2.5% with similar gloomy news for next year. The IMF is predicting just a 2.7% growth rate for 2012, down from a previous estimate of 2.9%.

It's not just the US. The crisis in the Euro zone with Greece looking more and more like it's ready to fall off the cliff and big problems in Ireland and Portugal. In short, there is very little cheer in the developed world.

And it might get a lot worse:

"You cannot afford to have a world economy where these important decisions are postponed because you're really playing with fire," said Jose Vinals, director of the IMF's monetary and capital markets department.

"We have now entered very clearly into a new phase of the (global) crisis, which is, I would say, the political phase of the crisis," he said in an interview in Sao Paulo, where the forecast was published.

In the United States, the political problems include a fight over raising the debt ceiling. Fears that the world's biggest economy could default, even briefly, have rattled markets, with Fitch Ratings saying even a "technical" default would jeopardize the country's AAA rating.

Meanwhile, Greece has edged closer to default as euro zone officials disagree on a possible second aid package for the indebted country. With strikes and protests around the country, political turmoil has added to uncertainty, stoking fears that the government will not be able to tighten its belt enough to reduce crippling deficits.

"If you make a list of the countries in the world that have the biggest homework in restoring their public finances to a reasonable situation in terms of debt levels, you find four countries: Greece, Ireland, Japan and the United States," Vinals said.

Many analysts see even slower growth - somewhere between 2.0 and 2.3% for this year. Although some indicators were up this week, the latest downer is a report on consumer confidence - the dreaded "worse than expected" number shows a significant decline from last month.

And inflation? Stay tuned.

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