The IMF lowered its 2014 global economic growth forecast Thursday, warning of "negative surprises" from the United States and China and geopolitical risks in Ukraine and the Middle East. The International Monetary Fund projected global growth of 3.4 percent for this year, down from its April estimate of 3.7 percent. In 2013, the world economy grew 3.2 percent.
The downgraded 2014 growth outlook reflects "both the legacy of the weak first quarter, particularly in the United States, and a less optimistic outlook for several emerging markets," the IMF said, in an update of its semi-annual World Economic Outlook. The US economy, which accounts for nearly a quarter of the world's gross domestic product, shrunk by 2.9 percent in the first quarter, in part because of severe winter weather.
On Wednesday, the IMF lowered its 2014 US growth forecast to a "disappointing" 1.7 percent, from 2.0 percent in mid-June and 2.8 percent in April. "It's really a story of something which has just happened and that is behind us," said Olivier Blanchard, the IMF's chief economist.
The IMF is projecting growth will pick up in the US the rest of the year, but not enough to offset the first-quarter drag. China, the world's second-largest economy, will expand less than previously thought, the IMF said, lowering its forecast to 7.4 percent from 7.6 percent. "In China, domestic demand moderated more than expected," it said. In the eurozone, still struggling to recover from recession, the growth estimate was unchanged at 1.1 percent, and the IMF reiterated concern about weak inflation in the 18-nation European bloc.
"In major advanced economies, there is a risk of stagnation in the medium term," the IMF warned. The brief update showed the IMF increasingly concerned by escalating geopolitical tensions. "Geopolitical risks have risen relative to April: risks of an oil price spike are higher due to recent developments in the Middle East while those related to Ukraine are still present," the report said. Russia, the target of recent US and European Union economic sanctions for its alleged support of separatist fighting in Ukraine, was likely to see its economy brought to the brink of recession this year.
IMF slashed its Russian growth forecast by 1.1 percentage point, to 0.2 percent, saying "activity in Russia decelerated sharply as geopolitical tensions further weakened demand." Emerging-market economies would slow a bit more than previously estimated, to a 4.6 percent growth pace, but they were not expected to suffer significantly from the eventual US exit from extremely loose monetary policy.
"Emerging market economies - particularly those with domestic weaknesses and external vulnerabilities - may face a sudden worsening of financial conditions and a reversal in capital flows in the event of a shift in financial market sentiment," the IMF said. Such a scenario occurred in 2013 when investors abruptly withdrew capital from emerging-market economies anticipating the Federal Reserve would raise its key US interest rate, stuck near zero since late 2008. That did not happen, but the Fed is looking to hike the federal funds rate in mid-2015. "I don't think we'll see major financial chaos in the future... but there are going to be bumps,"Blanchard said. Despite the worse-than-expected global growth outlook for 2014, the IMF left its 2015 forecast unchanged at an annual rate of 4.0 percent, the fastest pace since 2011.