IMF cuts global growth forecast on risks in emerging markets, euro recession

WASHINGTON (AFP) - The International Monetary Fund (IMF) on Tuesday cut its global economic growth forecast, citing new downside risks in key emerging-market economies and a deeper recession in the euro zone.

The IMF projected the world's economy would grow 3.1 per cent this year, down from its April estimate of 3.3 per cent. China and other emerging economic powers now face new risks, it warned, "including the possibility of a longer growth slowdown". The global lender said growth had been affected by increased financial market volatility and rising interest rates in advanced economies since its last World Economic Outlook (WEO) report was published in April.

"Emerging-market economies have generally been hit hardest, as recent increases in advanced economy interest rates and asset price volatility, combined with weaker domestic activity have led to some capital outflows, equity price declines, rising local yields, and currency depreciation," the IMF said in a WEO update.

The expected US Federal Reserve's unwinding of its massive monetary policy stimulus could trigger sustained capital outflows from emerging-markets, the IMF warned.

"Monetary easing can be the first line of defence against downside risks" in emerging-market and developing economies, where inflation was generally expected to moderate, it said.

But fiscal policy options may be limited.

"Real policy rates are low already, and capital outflows and price effects from exchange rate depreciation may also constrain further easing," the IMF said.