WASHINGTON • The six-year-old global recovery is showing some rust. The International Monetary Fund (IMF) cut its world growth outlook, as the commodities slump and political gridlock push Brazil deeper into recession, plunging oil prices hobble Middle East crude producers, and the rising dollar curbs US prospects.
The world economy will expand 3.4 per cent this year, down from a projected 3.6 per cent last October, the IMF said yesterday in a quarterly update to its World Economic Outlook.
The Washington-based fund also cut its forecast for growth next year to 3.6 per cent, down from 3.8 per cent three months ago.
The downbeat outlook has clouded the picture for IMF managing director Christine Lagarde and more than 2,500 policymakers, corporate executives, investors and academics heading to Davos, Switzerland, for this week's annual meeting of the World Economic Forum.
It comes at a time when financial markets have been roiled by worries over China's slowdown and plummeting oil prices.
The IMF maintained its previous China growth forecasts of 6.3 per cent this year and 6 per cent next year, which nonetheless represent sharp slowdowns from 6.9 per cent last year and 7.3 per cent in 2014.
But the fund said a steeper slowing of demand in China remained a risk to global growth and that weaker-than-expected Chinese imports and exports were weighing heavily on other emerging markets and commodity exporters.
"We don't see a big change in the fundamentals in China compared to what we saw six months ago, but the markets are certainly very spooked by small events there that they find hard to interpret," IMF economic counsellor Maurice Obstfeld said in a videotaped statement.
Saudi Arabia's economy will grow by just 1.2 per cent this year - compared with the 2.2 per cent it estimated last October, IMF said. This would be the worst growth rate for Saudi Arabia since 2009 because of the sharp fall in crude prices due to the global financial crisis.
The forecast offers little solace amid a gloomy start to 2016 for financial markets. The Standard & Poor's 500 Index of stocks is off to its worst start to a year on record, as the oil slide and tightening US monetary policy drive flight from riskier assets around the world.
The fund said risks to the global outlook remain tilted to the downside, with the world facing three big adjustments: the emerging-market slowdown, China's shift to growth driven less by exports and manufacturing, and the Federal Reserve's gradual exit from ultra-low interest rates. Global growth could be derailed if these challenges aren't managed, the IMF warned.
While markets seem to be over- reacting to oil and China data, Mr Obstfeld told a news conference after the data announcement that it was critical China is clear about its overall policy strategy, including its currency.
"This coming year is going to be a year of great challenges and policymakers should be thinking about short-term resilience and the ways they can bolster it, but also about the longer-term growth prospects," Mr Obstfeld said in a fund article accompanying the forecast.
"We may be in for a bumpy ride this year, especially in the emerging and developing world," he said.