The International Monetary Fund raised its global growth forecasts for the first time in nearly two years today amid rising demand and inventories in advanced economies, which picked up the mantle of growth from emerging markets.
But the IMF warned richer nations were still growing below full capacity, and added the spectre of deflation to its long list of risks that could derail the nascent recovery. In an update to its “World Economic Outlook,” the IMF predicted 3.7 per cent global economic growth this year, 0.1 percentage point higher than its October projections, and sees growth of 3.9 per cent in 2015.
It forecast higher growth in advanced economies this year but kept its outlook unchanged for the developing world, where higher exports to rich nations should be offset by weak demand at home.
"There will be more growth rotation from emerging market economies to advanced economies in 2014-15," Olivier Blanchard, the IMF's chief economist, said in a statement.
The United States is likely to be one of the bright spots, after a budget deal in Congress reduced some of the government spending cuts that had weighed on domestic demand.
US data last month showed a pile-up in business inventories, the most since 1998, helped boost third-quarter GDP, and the IMF expects domestic demand to lift growth to 2.8 per cent in 2014.
The IMF warned other rich nations now risk the same problem of sluggish price growth, which can happen when economies linger well below their full potential. “It also raises the likelihood of deflation in the event of adverse shocks to activity,” the IMF said very low inflation.
A falling spiral of prices would weaken demand by making cash more valuable over time, discouraging consumption. It also increases the value of debt, a big problem for highly indebted places like the United States and the euro zone. The IMF urged central banks to avoid raising interest rates too soon while growth remains fragile, and called on the European Central Bank in particular to help sluggish demand by boosting credit growth.
Bank lending has decreased in many crisis-ridden southern European countries. But banks had previously used the bulk of cheap loans from the ECB to buy government bonds instead of loaning to the real economy, showing the limits of monetary policy. The IMF warned that some developing countries, especially those with large current account deficits or domestic weaknesses, could be hit hard by capital outflows this year as the Federal Reserve begins to scale back its pace of US asset purchases.
The IMF urged such economies to let their exchange rates depreciate, or consider tighter monetary policy or stronger regulation or supervision. Central banks may not have much room to act in emerging markets, many of which are growing close to full capacity.
For such countries, “the main policy approach for raising growth must be to push ahead with structural reform,” the IMF said.
It particularly singled out China, calling on the world's second-largest economy to move more quickly towards consumption-led growth, and away from investment.
After 30 years of sizzling economic growth, often in the double digits, that lifted many millions of Chinese out of poverty but also devastated the environment, China wants to change tack by embracing sustainable and higher-quality development.
That means reducing government intervention to allow financial markets to have a bigger say in allocating resources, and promoting domestic consumption at the expense of investment and exports. As the changes start to take effect, the IMF expects China’s economy to grow 7.5 per cent this year, and 7.3 per cent the next, which would be some of the lowest rates of expansion in over a decade.