The International Monetary Fund (IMF) cut its 2013 growth forecast for the world economy Tuesday to 3.1 percent, due to a slowdown in several key emerging market economies.
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The new figure is 0.2 percentage point lower than its April projection.
The slower growth of the global economy was “driven to a large extent by appreciably weaker domestic demand and slower growth in several key emerging market economies, as well as by a more protracted recession in the euro area,” the IMF said in the update of its flagship World Economic Outlook report.
The Washington-based global lender also revised down its forecast for the world economic growth in 2014 to 3.8 percent, also 0.2 percentage point lower than its April estimate.
“Downside risks to global growth prospects still dominate: while old risks remain, new risks have emerged, including 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 United States leads to sustained capital flow reversals,” the report said.
The IMF said the underperformance of global economic growth was due to three factors. First, growth continued to disappoint in major emerging market economies, reflecting, to varying degrees, infrastructure bottlenecks and other capacity constraints, slower external demand growth, lower commodity prices, financial stability concerns, and, in some cases, weaker policy support.
Growth everywhere was little weaker than the April forecast. The BRICS countries (China, Brazil, Russia, India and South Africa) had run into “speed bumps”, IMF chief economist Olivier Blanchard said Tuesday at a press conference.
The Chinese economy was expected to ease to 7.8 percent growth in 2013 and 7.7 percent in 2014.
Many emerging markets and developing economies face a trade-off between macroeconomic policies to boost weak economic activities and those to contain capital outflows, the IMF said.
In emerging economies, “monetary easing can be the first line of defense against downside risks.” With weaker growth prospects and potential legacy problems from a prolonged period of rapid credit growth, the policy framework must be ready to handle possible increases in financial stability risks, it said.
Second, the recession in the euro area was deeper than expected, as low demand, depressed confidence, and weak balance sheets interacted to exacerbate the effects on growth and the impact of tight fiscal and financial conditions.
The euro area would remain in recession in 2013, with economic activity contracting by 0.6 percent. Growth would rise to 0.9 percent in 2014, 0.1 percentage point weaker than previously projected, the report said.
Third, the U.S. economy had expanded at a weaker pace, as stronger fiscal contraction weighed on improving private demand.
The IMF predicted that the U.S. economy would expand 1.7 percent in 2013 before firming to 2.7 percent in 2014. The IMF’s projection was more pessimistic than the White House’s latest economic outlook. The White House predicted Monday the U.S. economy would grow 2 percent this year and 3.1 percent in 2014 due to continued government spending cuts.
The IMF suggested developed countries should “maintain a supportive macroeconomic policy mix, combined with credible plans for reaching medium-term debt sustainability and reforms to restore balance sheets and credit channels.”
“Weaker growth prospects and new risks raise new challenges to global growth and employment, and global rebalancing. Policymakers everywhere need to increase efforts to ensure robust growth,” the report said.