IMF Cuts World Growth Outlook

IMF Cuts World Growth Outlook

The IMF cut its forecast for global growth this year, citing a weaker first quarter in the U.S. and warning that financial-market turbulence from China to Greece clouds the outlook.

The world economy will grow 3.3 percent in 2015, less than the 3.5 percent pace projected in April and slower than the 3.4 percent expansion last year, the International Monetary Fund said in revisions to its World Economic Outlook released Thursday in Washington. The fund left its forecast for growth next year unchanged at 3.8 percent.

While the IMF left its 2015 projections for China and the euro area unchanged from April, it singled out both economies as areas sources of potential risk. Chinese stocks have tumbled in recent weeks and Greece is struggling to reach a deal with European creditors to stay in the euro area.

“Disruptive asset price shifts and a further increase in financial market volatility remain an important downside risk,” the fund said in the report.

Much of the global downgrade was driven by the U.S., which the fund now sees growing 2.5 percent this year, compared with 3.1 percent in April. The IMF this week reiterated its recommendation that the Federal Reserve hold off raising interest rates until the first half of next year, when wage and price inflation are expected to pick up.

The IMF characterized the U.S. setback as “temporary,” saying the world’s biggest economy remains poised for an acceleration of consumption and investment as wages rise and employers hire workers.

Risks Abound

Still, the fund warned that risks to the world recovery remain “tilted to the downside.”

“The projected pickup in global growth, while still expected, has not yet firmly materialized,” the fund said. “Raising actual and potential output through a combination of demand support and structural reforms continues to be the economic policy priority.”

The IMF acknowledged the recent turmoil caused by faltering debt talks with Greece and a plunge in Chinese stocks.

The reaction of financial markets to the repudiation of creditor proposals by Greek voters on Sunday has been “relatively muted, with some decline in the prices of risky assets and a modest increase in the prices of safe-haven sovereign bonds,” the fund said.

“In Greece, unfolding developments are likely to take a much heavier toll on activity relative to earlier expectations,” the fund said.

Chinese Equities

China’s benchmark equity index has plummeted 28 percent since June 12 despite moves by authorities to freeze trading in some stocks. “Greater difficulties in China’s transition to a new growth model, as illustrated by the recent financial market turbulence,” pose a risk to the global recovery, the IMF said.

The IMF reduced its projection for growth in advanced economies to 2.1 percent, down from 2.4 percent.

The fund left its forecast for the euro-area unchanged at 1.5 percent, while cutting its outlook for Japan to 0.8 percent from 1 percent in April.

The first-quarter slowdown in the U.S. hindered growth in Canada and Mexico. The fund projects Canada will grow 1.5 percent this year, down 0.7 percentage point from April, while Mexico’s growth was cut to 2.4 percent from 3 percent.

Emerging markets should grow 4.2 percent this year, down 0.1 percentage point from the fund’s April projection. The fund left its forecast for China’s expansion this year unchanged at 6.8 percent. Brazil’s economy will contract 1.5 percent, compared with a forecast for a 1 percent drop in April, according to the IMF.

The IMF urged advanced economies to keep monetary policy loose to lift inflation back to target. Countries with fiscal space should increase spending, especially on infrastructure, while the need for structural reforms remains urgent across the advanced world, the fund said.

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