IMF cuts global growth forecast on back of unrest in Middle East and Ukraine

The International Monetary Fund has downgraded its outlook for global growth, blaming a "weak first quarter" in which the US economy contracted and "a less optimistic outlook for several emerging markets".

In its latest World Economic Outlook, the Washington-based fund said the conflicts in Ukraine and Iraq risked denting global growth.

As a result, it predicted the global economy would advance 3.4 per cent this year, less than the 3.6 per cent prediction it made in April.

It forecast that growth would be 4 per cent next year, compared with its previous forecast for 3.9 per cent.

The IMF report reflected a world rattled by geopolitical risks that have risen since April, including the potential for “sharply higher oil prices” due to Middle East unrest.

Growth in emerging markets is projected to be 4.6 per cent this year, compared with an April forecast of 4.9 per cent, the IMF said.

China’s economy is seen growing 7.4 per cent this year, less than the 7.5 per cent forecast in April, the IMF said.

Slow further

Next year, growth in the world’s second-largest economy will slow further, to 7.1 per cent, the fund said, less than its forecast in April for 7.3 per cent growth.

Among developing economies, the biggest reduction in forecasts was for Russia's growth, which was downgraded to 0.2 per cent from 1.3 per cent amid capital flight caused by its involvement in the conflict in Ukraine. "Sanctions could probably further decrease the growth rate of Russia, " said IMF chief economist Olivier Blanchard.

Japan’s projected 1.6 per cent advance this year may be followed by 1.1 per cent in 2015, “mostly due to the planned unwinding of fiscal stimulus”, the IMF said.

In the euro zone, Italy and France were cut, while Spain was revised higher to 1.2 per cent, up from 0.9 per cent.

Most of the downgrade for this year in developed economies was due to the US, which was cut to 1.7 per cent from a 2.8 per cent forecast in April because of a first-quarter contraction. The 2015 forecast was unchanged at 3 per cent.

“The recovery continues, but it remains a weak recovery,” said Mr Blanchard.

“Advanced economies are still confronted with high levels of public and private debt, which act as brakes on the recovery. These brakes are coming off, but at different rates across countries.”

He added that emerging markets were slowing down from pre-crisis growth rates.

"They have to address some of their underlying structural problems, and take on structural reforms. At the same time, they have to deal with the implications of monetary policy normalisation in the US." – (Additional reporting: Bloomberg, Reuters)