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Managing Director of the International Monetary Fund (IMF) Christine Lagarde speaks at the Global Investment Conference 2012 in London July 26, 2012. British Prime Minister David Cameron urged global business leaders gathered in London on Thursday ahead of the Olympics to invest in Britain, a day after data showed the economy is in much worse shape than previously thought. (Neil Hall/REUTERS)

Managing Director of the International Monetary Fund (IMF) Christine Lagarde speaks at the Global Investment Conference 2012 in London July 26, 2012. British Prime Minister David Cameron urged global business leaders gathered in London on Thursday ahead of the Olympics to invest in Britain, a day after data showed the economy is in much worse shape than previously thought.

(Neil Hall/REUTERS)

IMF: Austerity is the scary part Add to ...

Should you care about the IMF report? The International Monetary Fund downgraded its assessment on the global economy, cutting its forecasts for growth in 2013 to 3.6 per cent from 3.9 per cent in July. And even that tempered view assumes the United States can avert its “fiscal cliff” and euro zone governments can agree on closer integration.

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But the IMF also held out some hope for a less gloomy outcome.

“If uncertainty is indeed behind the current slowdown, and if the adoption and implementation of these measures decrease uncertainty, things may turn out better than our forecasts, not only in Europe, but also in the rest of the world,” said Olivier Blanchard, chief economist at the IMF, in the report . “I, for once, would be happy if our baseline forecasts turn out to be inaccurate – in this case, too pessimistic.”

Unfortunately, that’s not likely. Indeed, the IMF might be a little late here in its reassessment, given the number of indications in recent months that growth is sputtering. U.S. gross domestic product growth has already slowed to 1.3 per cent, commodity prices have slumped and observers are growing increasingly concerned about China’s slowdown.

What’s more, the IMF is only now acknowledging that cutbacks in government spending might be aggravating the economy more than originally estimated – something that a number of prominent economists, including Paul Krugman, have been warning about for some time.

The IMF said that it had been using a so-called fiscal multiplier of 0.5 on such cutbacks, meaning that a dollar lost in government spending cut economic output by 50 cents. But it’s worse than that: The fiscal multiplier has ranged between 0.9 and 1.7 “Basically, the Fund looks at the severity of the downturns in countries practicing severe fiscal austerity and says, gee, maybe fiscal policy has a big impact after all,” Mr. Krugman said in his New York Times blog .

No wonder the stock market ignored the IMF report at the start of trading on Tuesday, when the S&P 500 opened little changed. It dipped soon after – perhaps on the realization that lower expectations for economic growth are no big deal, but that austerity measures are.

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