WASHINGTON, D.C.: The International Monetary Fund (IMF) warned of stagnation in advanced economies on Tuesday as it trimmed its growth forecast for the whole world.
The global economy faces an increase in risks this year from the Russia-Ukraine crisis and strife in the Middle East, and the wider economic threat if the Ebola outbreak in West Africa is not contained.
And it said that the deep wounds of the economic crisis that began in 2008 are “proving tougher to resolve,” especially in Europe.
“Given these increased risks, raising actual and potential growth must remain a priority,” the Fund said in its semi-annual World Economic Outlook report.
But the IMF also said that the strength of advanced economies could be enhanced with much-needed investment in infrastructure, financed by the state.
“Should the recovery stall, being ready to do more would be important,” said the global crisis lender, whose financial assistance programs typically require budget reductions.
Olivier Blanchard, the IMF’s chief economist, speaking at a news conference at the Fund’s Washington headquarters, emphasized that higher infrastructure spending could play an important role in reviving growth.
“It’s one of the ironies of macroeconomics that sometimes when countries get into trouble because they have too much debt the solution is actually to create more debt somewhere,” he said.
The IMF lowered its forecast for global growth this year to 3.3 percent, down 0.1 percentage point from July and 0.4 point less than it envisaged in April.
The 2015 outlook has been cut to 3.8-percent growth, compared with 4.0 percent previously forecast.
The overall projections appeared even less buoyant in the details. The growth forecast for the world’s largest economy, the United States, was revised upward 0.5 percentage point to 2.2 percent this year, recognizing the country’s sharp rebound from a first-quarter contraction.
That served to offset in the overall figure worrisome growth downgrades for the eurozone—cut to just 0.8 percent this year and 1.3 percent in 2015—and Japan, slashed to 0.9 percent this year and 0.8 percent next year.
And while the forecasts for China, the second-largest economy, and East Asia generally were unchanged (for China 7.4 percent this year, 7.1 percent in 2015), prospects were significantly dimmer than before for Latin America, the Middle East and North Africa, and the rest of Africa.
The United States and Britain were singled out, leading the way with “decent” growth, but even so the IMF hedged its enthusiasm.
“Even for those two countries, potential growth is now lower than in the early 2000s,” it said.
Last week International Monetary Fund Managing Director Christine Lagarde stressed the danger of a “new mediocre” in economic expansion that does not generate more jobs for the unemployed.
The IMF report also evoked a worry increasingly discussed among economists, “secular stagnation” in advanced economies, where private demand and investment growth dries up, and job creation slows well shy of the goal of full employment.
That could reduce the growth potential of a country, and ultimately impact the global economy, it said.
Eurozone stagnation risk
The deepest such worry is the eurozone, where a stalling recovery could see demand further weaken and deflation take root.
The IMF stressed that such a scenario is not the one it sees most likely, as the European Central Bank acts to further stimulate investment and spending with negative interest rates.
“We believe euro area fundamentals are slowly improving,” said IMF chief economist Olivier Blanchard.
“But should such a scenario play out, it would be the major issue confronting the world economy.”
Other clear risks on the immediate horizon, it said, include turbulence from monetary policy tightening and higher interest rates in the United States, something that already sparked capital outflows in developing economies last year.
But the IMF also said that could stir more turbulence in global asset markets.
“Financial markets may be too complacent about the future,” Blanchard warned. “These risks should not be overplayed, but policymakers clearly must be on the lookout.”
Another is the still-uncontrolled Ebola outbreak in West Africa, which has claimed almost 3,500 lives. The impact of the disease has already wreaked havoc on the economies of Liberia, Sierra Leone and Guinea.
If it is not brought under control, that economic impact could become global, the IMF said.
“Should the outbreak continue to intensify and spread significantly to neighboring countries, it could have more far-reaching consequences.”