IMF Cuts Global Growth Outlook On Weaker Emerging Markets, EZ Recession

(RTTNews) - The International Monetary Fund on Tuesday lowered the global growth projections for the fifth consecutive time, citing weaker domestic demand in the emerging market economies and a more protracted recession in the euro area.

In an update to its World Economic Outlook, the lender forecast the global economic growth at 3.1 percent this year, which was less than its April projection of 3.3 percent, but equaled last year's growth figure.

In 2014, the world economy is seen expanding 3.8 percent, which is also slower than the 4 percent forecast in April.

"Downside risks, old and new, still dominate the outlook," the IMF said. "Although imminent tail risks in advanced economies have diminished, additional measures will be needed to keep them at bay, including timely increases in the U.S. debt ceiling and continued "do what it takes" action by the euro area authorities to avoid a sharp deterioration in financial conditions."

The Washington-based lender also drew attention to increased risks of a longer growth slowdown in emerging market economies, due to protracted effects of domestic capacity constraints, slowing credit growth, and weak external conditions.

Further, the IMF said forecasts assume that the recent rise in financial market volatility and the associated yield increases will partly reverse, as they largely reflect a one-off repricing of risk due to the changing growth outlook for emerging market economies and temporary uncertainty about the exit from monetary policy stimulus in the United States.

"However, if underlying vulnerabilities lead to additional portfolio shifts, further yield increases, and continued higher volatility, the result could be sustained capital flow reversals and lower growth in emerging economies," the lender warned.

The 2013 growth forecast for the U.S. was cut to 1.7 percent from 1.9 percent, and the outlook for next year was lowered to 2.7 percent from 3 percent.

The projections are based on the assumption that the sequestration will remain in place until 2014, longer than previously projected, although the pace of fiscal consolidation is expected to slow. The IMF expects private demand to remain solid, given the rising household wealth owing to the housing recovery, and still supportive financial conditions.

The 17-nation Eurozone is expected to shrink 0.6 percent this year, worse than the 0.3 percent contraction seen in April. The economy is projected to register growth of 0.9 percent next year, but the forecast is smaller than the 1.1 percent expansion seen earlier.

"Activity in the region continues to suffer from the combined effects of low demand, depressed confidence, financial market fragmentation, weak balance sheets, and fiscal consolidation," the IMF said.

Among the big four economies in the euro area, all except Germany is forecast to shrink this year. However, each of them except Spain is projected to witness expansion next year.

Meanwhile, Japan is likely to see brighter prospects this year, according to the IMF. The lender raised the country's growth forecast for this year to 2 percent from 1.6 percent. The growth outlook for 2014, however, was lowered to 1.2 percent from 1.4 percent, on account of weaker global environment.

The IMF cut the 2013 growth forecast for emerging market and developing economies to 5 percent. In 2014, the group is expected to log 5.4 percent growth. The weaker prospects reflect infrastructure bottlenecks, capacity constraints, lower export growth, lower commodity prices, financial stability concerns, and weaker monetary policy support, the report said.

China's growth forecast for this year was cut to 7.8 percent from 8 percent. The country registered similar growth last year. In 2014, the Chinese economy is expected to grow 7.7 percent, which is much slower than the April projection of 8.2 percent.

The 2013 growth forecast for India was cut slightly to 5.6 percent from 5.7 percent. Next year, the economy is seen growing 6.3 percent, which is a tad faster than April's 6.2 percent.

Growth forecast for remaining emerging economies were also lowered. The IMF expects growth to remain weak in the sub-Saharan Africa region as well as the Middle East and North Africa.