International Monetary Fund cuts global forecast for 2014

International Monetary Fund lowered its outlook for global growth this year as expansions weaken from China to the United States and military conflicts raise the risk of a surge in oil prices.

The IMF said that the world economy will advance 3.4% in 2014, less than its 3.6% prediction in April and stronger than last year’s 3.2%. Next year growth will be 4% compared with an April forecast for 3.9%.

Global growth could be weaker for longer, given the lack of robust momentum in advanced economies even as interest rates stay low. Monetary policy should thus remain accommodative in all major advanced economies.

The IMF report reflected a world rattled by geopolitical risks that have risen since April, including the potential for sharply higher oil prices because of recent Middle East unrest. Growth in emerging markets is projected to be 4.6% this year, compared with an April forecast for 4.9%.

China’s economy is seen growing 7.4% this year, less than the 7.5% forecast in April. Next year, growth in the world’s second largest economy with slow further, to 7.1% less than its forecast in April for 7.3% growth.

Among developing economies, the biggest reduction in forecasts was for Russia’s growth, which was downgraded to 0.2% from 1.3 estimated previously amid capital flight caused by its involvement in the conflict in Ukraine.

Mr Olivier Blanchard CEO of IMF said that “The IMF’s Russia forecasts exclude the effects of recent sanctions the United States has imposed on the country and don’t take into account any that the European Union might take. These sanctions could probably further decrease the growth rate of Russia.”

In Japan, the economy’s projected 1.6% advance this year may be followed by 1.1% from in 2015 mostly due to the planned unwinding of fiscal stimulus. In the 18 country euro region, Italy and France were cut while Spain was revised higher to 1.2% up from 0.9%.

Most of the downgrade for this year in developed economies was due to the US which was cut to 1.7% from an April prediction of 2.8% because of a Q1 contraction. The forecast for 2015 was unchanged at 3%.

Mr Blanchard said that the US economy is forecast to grow 3% to 3.25% for the rest of the year. The fund agrees with Federal Reserve plans to wind down stimulus. The current plans, namely the end of tapering later this year and increases in the policy rate from the middle of next year, are appropriate. But the timing of the increase in the policy rate may have to be adjusted.