The International Monetary Fund, or IMF, cut its global growth forecast for 2013 and 2014, blaming continuing recession in euro zone countries and a slower-than-expected recovery in the U.S., both of which have contributed to slowdown in major emerging markets such as China, India and Brazil.
The IMF, on Tuesday, in an update to its World Economic Outlook, or WEO, said that the world economy will grow at 3.1 percent in 2013, at the same pace as last year and at 3.8 percent in 2014. The IMF earlier had projected the world economy to grow at 3.3 percent in 2013 and at 4.0 percent in 2014.
“Global growth increased only slightly in the first quarter of 2013, instead of accelerating further as expected at the time of the April 2013 WEO,” the IMF report said.
The IMF said that the global economy's underperformance was mainly due to a deeper-than expected recession in the 17-nation euro zone and the disappointing pace of the economic recovery in the U.S., and "continuing growth disappointments in major emerging market economies." The report highlighted weaker growth prospects for emerging markets and new risks worldwide challenging growth and employment.
The Fund projected the U.S. economy to grow at 1.7 percent this year and at 2.7 percent next year, 0.2 percentage points down from its forecast in April. The report also said federal spending cuts, popularly known as the sequester, along with a slowdown in economies worldwide, prompted the cuts in U.S. growth forecasts.
The Fund expects the U.S. Federal Reserve’s decision to end its bond-buying program -- if the U.S. economy picks up momentum in the current year -- to lead to capital outflows and currency depreciation across the world.
“The Fed is acting appropriately for the U.S. market but the side-effect of that are higher rates and a stronger dollar, and that exacerbates the problems in the emerging markets,” Jason Benowitz, a portfolio manager at Roosevelt Investment Group in New York told the Washington Post.
The Fund slashed its growth forecasts for the BRICS bloc, which includes Brazil, Russia, India, China and South Africa. The fund cut its growth forecast for China by 0.6 percentage points to 7.7 percent; for Brazil by 0.5 percentage points to 2.5 percent; for Russia by 0.9 percentage points to 2.5 percent; and, for India by 0.2 percentage points to 5.6 percent for 2013.
"In China, it looks like unproductive investment; in Brazil, it looks like low investment; and in India, it looks like policy and administrative uncertainty," Olivier Blanchard, the IMF's chief economist said.
On the other hand, the IMF revised upward its growth outlook for the resurgent Japanese economy, which has been riding a wave of reforms and a weaker yen, by 0.5 percentage points to 2 percent.
A protracted recession in euro zone countries remains a major concern and the Fund said the region’s economy is expected to contract 0.6 percent this year, but recover to a moderate 0.9 percent growth next year. However, the fund lifted its forecast for UK to 0.9 percent this year from its earlier estimate of 0.7 percent.
The IMF said strong measures are needed to address global challenges and boost growth in all countries.
“There is a need for structural reforms across all major economies, to lift global growth and support global rebalancing. As in the past, this means steps to raise domestic demand in economies with large current account surpluses (such as China and Germany) and measures that improve competitiveness in economies with large current account deficits,” IMF said.