IMF warns of risks as global economic recovery continues to improve

The International Monetary Fund (IMF) on Tuesday lowered its global economic growth forecasts for this year and the next, saying the world economic activity is strengthening, but it remains weak and uneven as slow-burn risks linger. In its updated economic outlook, the Washington-based institution expected the global economy to expand by 3.6 percent in 2014 and 3.9 percent in 2015, both of which were slashed 0.1 percentage point from January predictions but up from 3 percent in 2013. "Global activity strengthened during the second half of 2013 and is expected to improve further in 2014-15," the IMF said in its World Economic Outlook (WEO), warning that downside risks continue to dominate the outlook, despite some pickup in advanced economies, like the United States, the United Kingdom, and Germany. "The recovery which was starting to take hold in October is becoming not only stronger, but also broader" as "various brakes which limited growth are being slowly loosened," said IMF chief economist Olivier Blanchard at a news conference held here. The IMF expected growth in advanced economies to be the same with its forecast in January, at 2.2 percent and 2.3 percent for this year and the next, respectively. Growth in emerging markets was projected to increase from 4.7 percent in 2013 to 4.9 percent in 2014 and 5.3 percent in 2015, but both were slightly revised down from the last forecasts. Even with the downgrade, emerging market and developing economies continue to contribute more than two-thirds of global growth, said the IMF. The Fund kept its forecast for China unchanged at 7.5 percent in 2014 and 7.3 percent in 2015. "In some countries, such as China, lower growth may be in part a desirable by-product of more balanced growth. But in others there is clearly scope for a number of structural reforms which could help increase the underlying growth rate," Blanchard noted. Tension in Ukraine has added geopolitical risk, but for the moment it hasn't had global macroeconomic implications, said the report. The IMF cut Russia's growth forecast by 0.6 percentage point to 1.3 percent this year. LOW INFLATION HEADACHE FOR ADVANCED ECONOMIES In its latest assessment, the 188-member institution expected the U.S. economy to expand by 2.8 percent this year before strengthening further to 3 percent next year, up from a growth projection of 1.9 percent in 2013. In the euro area, growth will turn positive after having contracted for the last two years, with a projected pace of 1.2 percent and 1.5 percent this year and the next, respectively. The IMF highlighted risks of persistent low inflation in advanced economies. For the Euro Area where low inflation remains the dominant concern, the Fund said inflation is expected to remain below the European Central Bank's price stability objective until at least 2016. Blanchard warned that the deflation risks, if materialized, would make the adjustment both at the euro level and countries in the periphery "very difficult," urging the European Central Bank to take additional monetary easing measures as soon as possible. The IMF also expected monetary policy in the United States to continue to be supportive and the first interest rate hike to take place in the third quarter of 2015. RISKS RISE FOR EMERGING ECONOMIES Emerging market and developing economies must be ready to " weather market turmoil and reduce external vulnerabilities," the IMF said in the report, which was released as economic and financial leaders from around the world are gathering in Washington for the Spring Meetings of the Fund and the World Bank. "Stronger growth in advanced economies implies increased demand for their exports," Blanchard noted. "The normalization of monetary policy, however, implies tighter financial conditions and a tougher financial environment. Investors will be less forgiving, and macroeconomic weaknesses will become more costly." In fact, capital inflows recovered moderately in the latter part of 2013 from the lows reached in the summer of 2013 when the U.S. Fed began tapering talks. However, they are estimated to have remained below pre-tapering levels, according to the report. For China, the economic policy priority is to achieve a soft landing on the transition to more inclusive and sustainable, private-consumption-led growth. This shift would require actions including liberalizing interest rates, a more transparent, interest-rate-based monetary policy framework and a more flexible exchange rate regime. The IMF added as the Third Plenum of the 18th Central Committee of the Communist Party of China has laid out a reform blueprint that includes these policy steps, timely implementation must be a priority.