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IMF confirms world economy has entered a dangerous new phase

The world economy has entered a “dangerous new phase,” according to the chief economist of the International Monetary Fund. As a result, the international lending organization has sharply downgraded its economic outlook for the United States and Europe through the end of next year.

“The global economy has entered a dangerous new phase,” said Olivier Blanchard, the IMF’s chief economist. “The recovery has weakened considerably. Strong policies are needed to improve the outlook and reduce the risks.”

Financial turmoil and slow growth are feeding on each other in both the United States and Europe, IMF officials say. Europe’s debt crisis is causing banks to reduce lending and hold onto cash. Sharp stock market drops in the United States over the summer have hurt consumer and business confidence and will likely reduce spending. That slows growth, which leads many investors to shift money out of stocks and into safer investments, such as Treasury bonds.

In Europe, slower growth will make it harder for stressed nations to get their debt under control.

The IMF has lowered its outlook for the 17 countries that use the euro. The gloomier forecast for Europe is based on worries that euro nations won’t be able to contain their debt crisis and keep it from destabilizing the region.

[Associated Press]

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