IMF cut its global economic growth forecasts … warning Eurozone, Japan and Brazil

The International Monetary Fund cut its global economic growth forecasts for the third time this year yesterday, warning of weaker growth in core eurozone countries, Japan and big emerging markets like Brazil.

In its flagship World Economic Outlook report, the Washington-based lender cut its global growth expectations to 3.3% for this year and 3.8% for next year. In July it had expected growth of 3.4% in 2014 and 4% in 2015.

The IMF has now cut its current-year growth forecasts nine out of 12 times in the last three years as it consistently overestimated how quickly richer countries would be able to pull free from high debt and unemployment in the wake of the 2007-2009 global financial crisis.

It also lowered its expectations for longer-term potential growth, something its chief economist Olivier Blanchard called “the force from the future.”

“You have these forces from the past, the forces from the anticipated future … and I think that explains the sequence of revisions that we’ve had,” Blanchard said in an interview.

The IMF again urged countries to carry out an array of structural reforms, such as improving labour market policies, fighting tax evasion and raising infrastructure spending, to avoid the risk of economic stagnation. With interest rates already near rock-bottom in many advanced economies, it is harder to boost demand, Blanchard said, echoing the concerns of “secular stagnation” raised by former US Treasury Secretary Lawrence Summers.

“On whether we’ll be able to … increase demand enough to get to potential output, I think we don’t know yet,” Blanchard said at a news conference. “It may be difficult.”

The Fund’s gloomy projections set the stage for a gathering of the world’s top economic policymakers in Washington this week.

While richer countries like Britain and the US are seeing stronger expansions, the IMF downgraded forecasts for the three biggest economies in the eurozone currency bloc — Germany, France and Italy — and said it was essential advanced economies maintain monetary stimulus.

It also lowered growth projections for Japan and Brazil, among others. The IMF said potential growth in emerging markets is now 1.5 percentage points lower than what it foresaw in 2011.

“There is a risk that the recovery in the euro area could stall, that demand could weaken further, and that low inflation could turn into deflation,” Blanchard said in a foreword to the report. “Should such a scenario play out, it would be the major issue confronting the world economy.”

The IMF now sees a 30% chance of the eurozone slipping into deflation over the next year, and nearly a 40% probability the currency bloc could enter recession.

Financial markets have been roiled by the diverging growth prospects in the US, which is on track to tighten monetary policy next year, versus the ailing eurozone and a Japan that has dipped back into contraction.

The value of the US dollar had surged by the end of last week for 12 successive weeks, the longest rally in 40 years.

US Treasury Secretary Jack Lew appeared unfazed by the greenback’s appreciation, saying Washington supported other countries’ efforts to grow their economies.

Still, the eurozone will likely face pressure to do more to boost growth at the meetings this week, though Germany will caution against letting up on fiscal austerity.

The IMF warned that frothy financial markets could plunge suddenly once the US Federal Reserve starts raising interest rates, with Blanchard saying it was unclear whether regulators were “up to the task” of mitigating the potential fallout.

The Fund also warned that geopolitical tensions between Russia and Ukraine, and in the Middle East, were increasingly posing risks to the global economy and could shock oil prices and cause wider trade and financial disruptions.

With loose monetary policy reaching its limits and cash-strapped governments struggling to boost public investment, the IMF urged all countries to pursue deeper reforms. “The challenge … is to go beyond the general mantra of ‘undertaking structural reforms’ to identify both the reforms that are most needed and the reforms that are politically feasible,” Blanchard said.

The IMF left its forecast for China’s economic growth this year unchanged at 7.4% but warned the world’s second-largest economy faces a range of “near-term growth risks”, especially in real estate.

GDP growth will slow further to 7.1% next year, the IMF said in its latest World Economic Outlook report, citing a probable tightening of credit and ongoing weakness in the property market.

The figures came after the World Bank cut its own forecasts on Monday to 7.4% for 2014 and 7.2% in 2015.

But the IMF’s predictions were unchanged from estimates it gave in July, when it downgraded its projections for China’s expansion from 7.5% and 7.3% respectively.

India’s economy has recovered from a slump, the IMF said as it hiked its 2014-15 growth forecast to 5.6%, citing better exports and investment prospects under a new right-wing government.

The IMF’s year-on-year forecast for India’s financial year to March 2015 represents a 0.2-percentage-point uptick from its April projection.

The IMF said in its World Economic Outlook update that the following year would see Asia’s third-biggest economy expand 6.4%, unchanged from its previous prediction. “India has recovered from its relative slump, and, thanks in part to policy and a renewal of (economic) confidence, growth is expected to exceed 5% again,” Blanchard said.

Sub-Saharan Africa’s rapid economic growth is set to continue this year and next, but Ebola and budget problems have exposed the region’s vulnerabilities, the IMF said.

Forecasting 5.1% growth this year and 5.8% in 2015 — the fastest growth outside Asia — the Washington-based institution warned “the Ebola virus is exacting a heavy economic toll.”

More than 3,000 people have died as a result of the illness which is squeezing trade links between Guinea, Liberia and Sierra Leone, and the rest of the world.

“Should the Ebola outbreak become more protracted or spread to more countries, it would have dramatic consequences for economic activity in the west African region,” the IMF said.