IMF cuts global growth outlook over setbacks to US economy, slowdown in emerging markets

The seal of the International Monetary Fund is seen on a headquarters building in Washington, DC on July 5, 2015
The seal of the International Monetary Fund is seen on a headquarters building in Washington, DC on July 5, 2015PHOTO: AFP

SINGAPORE - The International Monetary Fund (IMF) has cut its global growth outlook for the second time this year, citing a slowdown in emerging markets and setbacks to the US economy in the first quarter which will be hard to recoup even as advanced economies inch towards recovery.

The IMF is now forecasting 3.3 per cent global growth this year, down from its 3.5 per cent forecast in April, it said in its latest World Economic Outlook report out on Thursday. The Fund had already marked down its forecast in January, from 3.8 per cent to 3.5 per cent.

The new number could mean world output this year grows slightly slower than it did last year, when it grew 3.4 per cent.

A surprise US contraction in the first quarter that spilled over to Canada and Mexico factored in strongly into the decision to pare expectations, the Washington-based IMF said.

The weaker activity was due to unexpectedly harsh weather, a port strike in the West Coast and lower investments in the oil sector. But these are "one-off" setbacks, said the IMF, and it sees a return to growth for the rest of the year.

Meanwhile, the eurozone recovery is "on track", said the IMF, adding that "developments in Greece have, so far, not resulted in any significant contagion."

The IMF expects that advanced economies in general will continue to benefit from "lower fuel prices, improving confidence and labour market conditions" this year.

"Easy financial conditions" are also a boon, said the IMF, in reference to the accommodative monetary policies that have been adopted in the Europe, US and Japan to stoke growth.

As for the emerging market economies, IMF projects that lower commodity prices, structural bottlenecks, and the slowdown in China will continue to be a drag on growth.

Still, the IMF is expecting a rebound from distressed economies - including Russia and other economies in the Middle East and North Africa - to drive a pickup in growth next year.

For this reason, IMF is sticking with its prediction for 3.8 per cent global growth in 2016.

But the IMF also warned that a rise in "financial market volatility and disruptive asset price shifts" could threaten global growth.

"There is a possibility of markets reacting strongly to surprises in this context," said the IMF, which promotes global financial stability.

For example, a jump in interest rates in the current low-interest rate environment could trigger massive capital outflows from emerging markets, which have been perceived to give a higher risk-return.

Notably, the IMF had on Tuesday reiterated its call for the US Federal Reserve to delay hiking its benchmark interest rates until next year, as it risks stalling its economy if it moves too soon.