The International Monetary Fund (IMF) cut its global economic growth forecasts for the third time this year on Tuesday, warning of weaker growth in core euro zone countries, Japan and big emerging markets like Brazil.
In its flagship World Economic Outlook report, the Washington-based body cut its expectations for global growth to 3.3 percent this year and 3.8 percent next year. The IMF in July had expected economic growth of 3.4 percent in 2014 and 4 percent in 2015.
The IMF has now cut its current-year growth forecasts nine out of 12 times in the last three years as it consistently overestimated how quickly richer countries would be able to pull free from high debt and unemployment in the wake of the global financial crisis in 2007-2009.
The Fund also lowered its expectations for longer-term potential growth, something its chief economist Olivier Blanchard called “the force from the future” that is already denting growth.
“You have these forces from the past, the forces from the anticipated future … and I think that explains the sequence of revisions that we’ve had,” Blanchard said in an interview.
The IMF again urged countries to carry out an array of structural reforms to support the recovery – or risk stagnation.
The Fund’s gloomy projections will set the stage for the gathering of the world’s top economic policymakers in Washington this week, who will meet to discuss how to deal with a flagging global economy as the United States gets ready to end its quantitative easing policies.
While richer countries like Britain and the United States are seeing a stronger economic expansion, the IMF downgraded its forecasts for the three biggest economies in the euro zone currency bloc – Germany, France and Italy – and said it was essential richer countries maintain monetary accommodation and low interest rates.
It also lowered growth projections for Japan and Brazil, among others. The IMF said potential growth in emerging markets is now 1.5 percentage points lower than what it foresaw in 2011.
“There is a risk that the recovery in the euro area could stall, that demand could weaken further, and that low inflation could turn into deflation,” Blanchard said in a foreword to the report.
“Should such a scenario play out, it would be the major issue confronting the world economy,” he said.
Markets have been roiled by the diverging growth prospects in the United States versus the ailing euro zone and a Japan that has dipped back into contraction. The value of the dollar had surged by the end of last week for 12 successive weeks, the longest rally in 40 years.
The IMF now sees a 30 percent chance of the euro zone slipping into deflation over the next year, and nearly a 40 percent probability the currency bloc could enter recession.
Most of the Western world will likely urge the euro zone to do more to boost growth at the meetings this week, though Germany will caution against letting up on austerity.
The IMF warned frothy valuations in financial markets could plunge suddenly once the U.S. Federal Reserve starts raising interest rates next year, as markets may be underpricing risks of diverging monetary policies in advanced economies.
“Macroprudential tools are the right instruments to mitigate these risks; whether they are up to the task, however, is an open question,” the IMF’s Blanchard said.
The IMF also warned geopolitical tensions between Russia and Ukraine, and in the Middle East, were increasingly posing risks to the global economy and could shock oil prices and cause wider trade and financial disruptions if conflicts escalate.
With loose monetary policy reaching its limits and cash-strapped governments struggling to boost public investment, the IMF urged all countries to pursue structural reforms, such as improving labor market policies, fighting tax evasion and raising infrastructure spending.
“The challenge … is to go beyond the general mantra of ‘undertaking structural reforms’ to identify both the reforms that are most needed and the reforms that are politically feasible,” Blanchard said.
