IMF cuts global GDP growth forecast

Outlook for China left unchanged

WASHINGTON: The International Monetary Fund lowered its 2015 global economic growth forecast on Thursday, citing a likely “temporary setback” from the United States in the first months of the year.

The IMF also highlighted the risk of “financial stress” in Europe from the Greek debt crisis and China’s slowdown, but left forecasts for the euro zone and the Asian giant unchanged.

The Washington-based institution projected the world economy would grow 3.3% this year, less than the 3.5% pace it had forecast in April and slightly slower than 2014. The 2016 forecast was for a pick-up to 3.8%.

“Moderate growth continues, with an improving recovery in advanced economies, and a slowdown in underlying growth in emerging-market and low-income developing economies,” said Olivier Blanchard, the IMF’s chief economist, at a news conference.

According to the IMF, the downgrade of the global growth forecast largely reflects the contraction in the US economy in the first quarter amid severe winter weather, which spilled over to neighboring Canada and Mexico.

“The unexpected weakness in North America, which accounts for the lion’s share of the growth forecast revision in advanced economies, is likely to prove a temporary setback,” it said.

Because of the setback, the IMF lowered its forecast for the United States, the world’s largest economy, by 0.6 percentage point to 2.5%.

Canada’s forecast was cut by 0.7 point to 1.5%, and Mexico’s by 0.6 point to 2.4%.

Blanchard said that the US economy’s soft first quarter, a 0.2% contraction, turned out to not be a sign of underlying weakness “now that the fog has largely cleared.”

“Fundamentals are still solid, and the US recovery is on track,” he said.

Greece’s debt crisis, which could force it to abandon the euro, for the moment only was having a marginal effect on the expansion of the global economy, the IMF said in the update of its World Economic Outlook.

The institution left unchanged its forecasts for the euro zone at 1.5%, and for the two largest economies: Germany (1.6%) and France (1.2%).

“Developments in Greece have, so far, not resulted in any significant contagion. Timely policy action should help to manage such risks if they were to materialise,” it said, noting the recovery in the euro zone seemed “broadly on track”.

But the recent rise in interest rates on the sovereign bonds in some euro area economies could signal larger problems ahead. “Some risks of a reemergence of financial stress remain,” it said.

The 188-nation IMF also left unchanged its forecast for China (6.8%) despite the turbulence in its capital markets.

“The puncture of what had clearly become a stock market bubble may have some limited effect on spending. But, for the moment, the slowdown in growth is primarily led by a slowdown in real estate investment, a development we see as basically desirable,” Blanchard said.

“There is no particular reason to have lost confidence in China’s economy because of the bursting bubble,’’ he added.

Japan, the world’s number-three economy, had some drag from sluggish consumption and wage growth, the IMF said, lowering its forecast by 0.2 point to 0.8%.

Slowing growth in emerging market and developing economies was also holding back momentum in the global economy.

The IMF said the contraction in Brazil, Latin America’s largest economy, would be worse than previously thought; it expects the economy to shrink by 1.5% this year.

But the outlook for Russia, also in recession, was improved, with a 3.4% contraction expected after improvements in commodity prices and confidence.

Risks to growth remained tilted to the downside, it said, including spillovers to economic activity from heightened geopolitical tensions in Ukraine, the Middle East and Africa.

Given these uncertainties, the IMF was waiting for better growth in 2016, estimated at 3.8%, but showed caution.

“The projected pick-up in global growth, while still expected, has not yet firmly materialised,” it said.