IMF's cut to its global growth forecast is its biggest in three years

WASHINGTON (Bloomberg) - The IMF made the steepest cut to its global growth outlook in three years, with diminished expectations almost everywhere except the U.S. more than offsetting the boost to expansion from lower oil prices.

The world economy will grow 3.5 per cent in 2015, down from the 3.8 per cent pace projected in October, the International Monetary Fund said in its quarterly global outlook released late Monday in Washington. The Washington-based lender also cut its estimate for growth next year to 3.7 per cent, compared with 4 per cent in October.

The growth-forecast reduction was the biggest since January 2012, when the fund lowered its estimate for expansion that year to 3.3 per cent from 4 per cent amid forecasts of a recession in Europe.

The IMF marked down 2015 estimates for places including the euro area, Japan, China and Latin America. The deepest reductions were in places suffering from crises, such as Russia, or for oil exporters including Saudi Arabia.

The weakness, along with prolonged below-target inflation, is challenging policy makers across Europe and Asia to come up with fresh ways to stimulate demand more than six years after the global financial crisis. Central bankers and government officials including Bank of England Governor Mark Carney and the Bank of Japan's Haruhiko Kuroda may talk about options when they convene this week at the World Economic Forum's annual meeting in Davos, Switzerland.

"The world economy is facing strong and complex cross currents," Olivier Blanchard, the IMF's chief economist, said in the text of remarks at a press briefing Tuesday in Beijing. "On the one hand, major economies are benefiting from the decline in the price of oil. On the other, in many parts of the world, lower long-run prospects adversely affect demand, resulting in a strong undertow."

The IMF cut its outlook for consumer-price gains in advanced economies almost in half to 1 per cent for 2015. Developing economies will see inflation this year of 5.7 per cent, a 0.1 percentage point markup from October's projections, the fund said.

The ECB should go "all in" in its bond-buying program, Blanchard said in an interview with Bloomberg TV. "We want to make sure that when there's an announcement, that it's as large as what the market's expecting."

The IMF also trimmed its estimate for China's growth to 6.8 per cent, down 0.3 percentage point from October. The government in the world's No. 2 economy will probably "put greater weight on reducing vulnerabilities from recent rapid credit and investment growth and hence the forecast assumes less of a policy response to the underlying moderation," the fund said.

The government needs to "avoid too-sharp a slowdown," the IMF's senior representative for China, Alfred Schipke, said in a press conference in Beijing. "Macro policies need to be carefully calibrated."

Japanese Prime Minister Shinzo Abe's decision to delay a second increase in consumption taxes, along with the boost from cheaper oil and a weaker yen, will enable a "gradual rebound" in that country's economy, the IMF said. Even so, the fund cut its estimate for growth to 0.6 per cent this year, from 0.8 per cent in October, after Japan slid into recession in the third quarter.

While China's growth is forecast to slow to 6.3 per cent in 2016, the IMF estimates India's growth accelerating to 6.5 percent in the fiscal year through March 2017 after growth of 6.3 per cent in fiscal 2016.

The IMF reiterated its estimate that the plunge in oil prices, which stands at about 56 percent since June, will increase global output this year between 0.3 percent to 0.7 percent. At the same time, the rout has added a "new risk dimension" to the world, the fund said.

Emerging markets face a risk of capital flight once the Federal Reserve starts raising interest rates, the IMF said. Risk have grown more acute among oil exporters, who have seen their external balances deteriorate since the oil market began collapsing last June, according to the IMF.

The fund reduced its estimate for emerging-market growth this year to 4.3 per cent, down from 5 per cent in October.