The U.S. is providing a “major impulse” to global growth that’s still lumbering amid weakness in Japan and parts of Europe, the IMF said in a report today. While the U.K. and Germany are adding to momentum, developing nations face new risks and Russia’s takeover of Crimea last month injects geopolitical tension that’s “casting a pall” on the region, the fund said.
The IMF urged emerging markets to prepare for flows of capital back to advanced economies, and advised the European Central Bank that more monetary easing is needed now to keep deflation at bay. The U.S. will benefit from a longer period of record-low interest rates orchestrated by the Federal Reserve, strong private demand and the end of a fiscal drag that slowed growth last year, it said.
“For the most part, the brakes are gone” in the U.S., IMF chief economist Olivier Blanchard said in a video accompanying the World Economic Outlook report. “The U.S. recovery is the strongest among advanced economies and therefore in a way it’s pulling the world.”
The IMF predicted global growth of 3.6 percent this year, compared with a January estimate of 3.7 percent. Next year, the expansion will accelerate to 3.9 percent, unchanged from the prior forecast.
The IMF raised its forecast for U.K. economic growth for the second time this year, predicting Britain will have the fastest expansion among developed nations. A separate report today showed U.K. industrial production rose a larger-than-forecast 0.9 percent in February.
In Japan, central bank officials refrained from adding to unprecedented monetary stimulus, indicating the Bank of Japan is confident in its outlook for economic growth.
“Global activity has broadly strengthened and is expected to improve further in 2014–15, with much of the impetus coming from advanced economies,” the IMF said in the report. “Activity in many emerging-market economies has disappointed in a less favorable external financial environment.”
The IMF sees the U.S. accelerating to a 2.8 percent expansion this year and 3 percent in 2015, unchanged from forecasts in January. Gross domestic product in the U.S. increased 1.9 percent last year.
U.S. stocks rose, with the Standard & Poor’s 500 Index gaining 0.3 percent to 1,850.08 at 12:02 p.m. in New York.
European stocks declined for a second day as investors weighed escalating tensions between America and Russia over the future of eastern Europe. The Stoxx Europe 600 Index slipped 0.6 percent to 332.85.
The fund said its forecasts are based on the assumption that the Fed’s first interest-rate increase will occur in the third quarter of 2015 and that its bond-buying program will end later this year.
In what it called a “worrying development,” the fund lowered predictions for Brazil, Russia, South Africa and Turkey. Brazil was reduced to 1.8 percent this year from 2.3 percent, and South Africa was cut to 2.3 percent from 2.8 percent.
Russia is seen growing 1.3 percent, down from 2 percent estimated in January, as the Ukraine crisis worsened an economy already weakened by volatile capital flows. If sanctions from the U.S. and the European Union intensified, contagion could spread to the Commonwealth of Independent States, the IMF said.
The IMF, which is preparing a loan program for Ukraine, considers the country’s debt sustainable, Blanchard said during a press conference in Washington.
Ukraine tensions are affecting Russia through a worsening investment climate, and “fairly substantial capital outflows” should be expected, which may lead the country to raise interest rates, he said.
In an interview with Bloomberg Television today, Blanchard said the fund’s forecast for Russia was computed before the Crimea takeover was “fully in play.” He said the IMF may further reduce its 2014 growth projection for Russia, possibly to less than 1 percent.
In the report, the Washington-based fund said the euro-area’s monetary authority needs to use unconventional measures to help sustain growth and meet price-stability goals.
“There are important risks that inflation will turn out even lower than forecast,” the IMF said. “Inflation expectations may drift lower,” which “in turn would lead to higher real interest rates, aggravate the debt burden, and lower growth.”
Possible actions include interest-rates cuts, “mildly negative” deposit rates and measures such as longer-term refinancing operations, according to the fund. ECB President Mario Draghi last week said the bank is exploring new policy avenues, including asset purchases.
The risk of deflation, which the IMF sees at 20 percent by the end of the year, comes as the euro region’s economy is expected to grow for the first time in three years following its sovereign-debt crisis.
The IMF forecast an expansion in the 18-country euro area of 1.2 percent this year, from 1 percent in January, raising the prediction for Spain by 0.3 percentage point to 0.9 percent.
Growth in France this year is seen at 1 percent and Germany’s economy is projected to gain 1.7 percent, the IMF said, lifting both countries’ outlook by 0.1 percentage point from January estimates.
The U.K. outlook was revised higher to 2.9 percent this year, from 2.4 percent in January, and to 2.5 percent next year from 2.2 percent, though the fund called the recovery there “unbalanced.”
An increase in Japan’s consumption tax will contribute to damping growth now seen at 1.4 percent this year, 0.3 percentage point less than in January.
While emerging nations still account for a large portion of world growth, they now have to contend with higher capital costs that are expected to hurt investment, according to the IMF.
“On the one hand you have a stronger growth in advanced economies that means more exports for emerging markets, that’s good,” Blanchard said. “On the other hand, normalization of U.S. policy means higher rates at some point, maybe less capital inflows, maybe even capital outflows.”
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