IMF Reduces Global Growth Outlook as U.S. Expansion Weakens

World economic growth will struggle to accelerate this year as a U.S. expansion weakens, China’s economy levels off and Europe’s recession deepens, the International Monetary Fund said.

Global growth will be 3.1 percent this year, unchanged from the 2012 rate, and less than the 3.3 percent forecast in April, the Washington-based fund said today, trimming its prediction for this year a fifth consecutive time. The IMF reduced its 2013 projection for the U.S. to 1.7 percent growth from 1.9 percent in April, while next year’s outlook was trimmed to 2.7 percent from 3 percent initially reported in April.

“Downside risks to global growth prospects still dominate,” the IMF said in an update to its World Economic Outlook. It cited “the possibility of a longer growth slowdown in emerging market economies, especially given risks of lower potential growth, slowing credit, and possibly tighter financial conditions if the anticipated unwinding of monetary policy stimulus in the U.S. leads to sustained capital flow reversals.”

The fund urged central banks in wealthy nations facing low inflation and economic slack to keep injecting stimulus until recovery is entrenched, saying rising longer-term interest rates have hurt emerging markets the most. The developing economies need to be alert for financial risks if the “anticipated unwinding” of the U.S. Federal Reserve’s bond-buying program reverses capital flows, the IMF said.

U.S. Economy

“The growth in the U.S. has slowed down, and they’re catching up to that,” Jay Bryson, a global economist at Wells Fargo Securities LLC in Charlotte, North Carolina, said after the IMF released its report. “This is not the U.S. economy of the 1990s that was a locomotive for the rest of the world” though the U.S. remains “one of the primary engines of growth.”

The Federal Reserve is discussing when to begin tapering its $85 billion in monthly bond purchases that are aimed at stimulating the economy. The Fed’s latest forecasts for the U.S. economy are more optimistic than those of the IMF. Policy makers in June projected U.S. growth of 2.3 percent to 2.6 percent in 2013 and 3 percent to 3.5 percent next year.

Chairman Ben S. Bernanke on June 19 said the Fed may dial back its asset-buying this year and halt purchases around mid-2014 if the economy meets central bank forecasts. The Fed has said it is waiting for the labor market to improve “substantially” before it starts to taper.

Payroll Gains

Payrolls in the U.S. rose by 195,000 workers for a second month in June, the Labor Department reported July 5 in Washington, exceeding the 165,000 gain projected by economists in a Bloomberg survey. The jobless rate stayed at 7.6 percent, close to a four-year low.

The IMF projected China’s growth will be 7.8 percent in 2013, down from an 8 percent April projection, and the 17-country euro area will shrink 0.6 percent as the economies of France, Italy and Spain contract. The IMF projected a 0.3 percent contraction for the euro area in April.

The IMF report says growth will weaken in emerging markets including China as external demand growth has slowed and advanced economy longer-term interest rate volatility has risen. The U.S. is held back by fiscal contraction and Europe will remain mired in recession on the heels of its debt crisis, according to the report.

Plans for record monetary easing and increased private demand boost the fund’s improved forecasts for Japan, the world’s third-largest economy, upgraded to 2 percent growth this year from a 1.6 percent projection in April.

Global Economy

The forecast for global growth next year is 3.8 percent, down from 4 percent in the IMF’s April projections.

In the report, the fund said advanced economies must continue to avert risks -- in the U.S., by making timely increases to the debt ceiling and in Europe, by continuing a “do what it takes” approach to mitigate financial fragmentation.

Monetary stimulus “should continue until the recovery is well-established,” the report states. The U.S., Japan and European Central Bank have all pursued record stimulus in an effort to boost their economies.

The euro region is still facing fallout from its financial crisis. European governments agreed this week to release 3 billion euros ($3.9 billion) of aid for Greece, seeking to create enough financial calm to prevent another debt-crisis showdown until after Germany’s elections in September.

The fund sees a contraction deepening in Italy to 1.8 percent and France will shrink 0.2 percent, according to today’s report.

Euro Area

The IMF said the euro area should work towards a fuller banking union, and push forward policies to support demand and reform product and labor markets in order to bolster growth and job creation.

Germany’s economy is forecast to grow 0.3 percent, less than the 0.6 percent expansion forecast in April. The country must pursue policies that will sustainably raise investment, the fund said, while China must pursue structural reforms that boost consumption.

Developing economies are seen growing 5 percent this year, compared with 1.2 percent for their advanced counterparts, according to the report. The number is less than the 5.3 percent expected as of April, though still faster than 4.9 percent expansion last year, according to the IMF.

Brazil’s 2013 growth outlook was dropped to 2.5 percent from 3 percent growth, while Russia’s forecast was downgraded to 2.5 percent from 3.4 percent expansion, today’s report said.

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