The International Monetary Fund (IMF) cut its global outlook yesterday, both for this year and next, as capital outflows weaken emerging markets and warned that a US debt default could “seriously damage” the world economy.
Growth worldwide would be 2.9 percent this year and 3.6 percent next year, the IMF said in a report yesterday. In July it predicted figures of 3.1 percent and 3.8 percent, respectively.
It sees emerging economies growing 4.5 percent this year, 0.5 percentage point less than three months ago, as projections were reduced for China, Mexico, India and Russia.
“Advanced economies are gradually strengthening” while “growth in emerging market economies has slowed”, IMF chief economist Olivier Blanchard wrote. “This confluence is leading to tensions, with emerging market economies facing the dual challenges of slowing growth and tighter global financial conditions.”
The forecasts factor in a short US government shutdown and an agreement on the nation’s debt limit before the October 17 deadline. A default “could seriously damage the global economy”, the fund said.
“A longer shutdown could have sizable adverse growth implications,” the IMF said.
“A failure to promptly raise the debt ceiling could also adversely affect financial markets and economic activity, with spillovers to the rest of the world.”
Bond prices slumped internationally after May 22, when Federal Reserve chairman Ben Bernanke said for the first time that the Fed might trim its asset purchase programme within the next few meetings.
The IMF said sovereign yields in developing markets were still 0.8 percentage point higher than at the beginning of the year.
“This change could pose risks for emerging market economies, where activity is slowing and asset quality weakening,” the IMF wrote.
The fund said its forecasts assumed the Fed would not raise its benchmark interest rate before 2016 and would start tapering its bond buying programme later this year.
The IMF cut its growth forecast for the US to 1.6 percent this year and 2.6 percent next year, each 0.1 percentage point less than forecast in July.
Its forecast for the euro zone was for a contraction of 0.4 percent this year, compared with July’s forecast of a 0.6 percent decline. The IMF now expects an expansion of 1 percent next year instead of 0.9 percent.
The fund cut the forecast for China to 7.6 percent this year (7.8 percent in July) and to 7.3 percent in 2014 (7.7 percent). “Without fundamental reform to rebalance the economy towards consumption and stimulate productivity growth through deregulation, growth is likely to slow considerably.”
Russia’s growth model also seemed “exhausted”, the report said. It put growth at 1.5 percent this year (2.5 percent) and 3 percent next year (3.3 percent).
India would grow 3.8 percent this year, from July’s 5.6 percent forecast, and Mexico’s growth this year was cut to 1.2 percent from 2.9 percent. – Sandrine Rastello and Jeanna Smialek in Washington for Bloomberg