IMF warns of downside risks amid uneven global recovery

The International Monetary Fund (IMF) on Tuesday lowered its global economic growth forecasts for the third time this year, warning that the global recovery remains uneven and downside risks have increased compared with the spring.

In its updated economic outlook, the Washington-based institution expected the global economy to grow 3.3 percent in 2014 and 3.8 percent in 2015, down 0.1 percentage point and 0.2 percentage point from its July's forecasts respectively.

The growth forecast cut was "largely due to weaker-than- expected global activity in the first half of 2014," the IMF said in its World Economic Outlook, adding that an uneven global recovery continues despite setbacks and the pace of recovery is becoming more country specific.

The IMF expected growth in advanced economies to be 1.8 percent in 2014, the same with its forecast in July, but lowered the 2015 growth rate forecast to 2.3 percent from July's 2.4 percent.

Growth in emerging markets was projected to reach 4.4 percent in 2014 and 5 percent in 2015, and both were slightly revised down from July's forecast. Even with the downgrade, emerging market and developing economies would continue to account for the "lion's share" of global growth, said the IMF.

The global lender kept its forecast for China unchanged at 7.4 percent in 2014 and 7.1 percent in 2015, but lower than its April predictions. "China is maintaining high growth, and its rebalancing is likely to imply slightly lower growth, but this must be seen as a healthy development," said IMF chief economist Olivier Blanchard at a press conference here on Tuesday.

UNEVEN RECOVERY

"The recovery continues, but it is weak and uneven," said Blanchard, adding that world growth is mediocre and a bit worse than forecast in July, and the evolution of the global economy has become more differentiated.

Among advanced economies, the United States and the United Kingdom are expected to achieve strong growth rebound, although their potential growth is now lower than in the early 2000s.

The IMF expected the U.S. economy to expand 2.2 percent in 2014, up 0.5 percentage point from its July forecast. The world's largest economy will sustain growth momentum in 2015 and expand at a rate of 3.1 percent, it said.

The euro area will likely continue weak recovery but at a much slower pace. Its growth is projected to average 0.8 percent in 2014 and 1.3 percent in 2015, weaker than July's forecasts.

In emerging market economies, differentiation is also the rule. China and India will continue relatively high growth, respectively at 7.4 percent and 5.6 percent in 2014, while Latin America and Caribbean economies are expected to grow at a rate of 1.3 percent in 2014 and due to geopolitical tensions and sanctions, the growth for Russia will slow to 0.2 percent this year.

The uneven recovery was due to the interplay of two forces -- the crisis legacies proving tougher to resolve than expected and lower potential growth, operating to different degrees in various countries, said Blanchard.

CLOUDS ON THE HORIZON

Amid the uneven recovery, downside risks had increased compared with the spring, said the IMF in the report.

Geopolitical tensions have increased, which will affect the commodity market and economic activity; the "unexpected bumps" from the monetary policy normalization in the United States remain; protracted low inflation has posed risks to activity in some advanced economies, the euro area in particular; and the real estate market correction in China is challenging the country's economic rebalancing and also affecting its growth.

In the medium term, both advanced and emerging markets will face lower potential growth, partly due to aging population and weak growth in total factor productivity.

In order to fight low inflation in some advanced economies, the IMF suggested maintaining an accommodative monetary policy stance. In addition, promoting public investment and structural reforms and adopting macro prudential policy will help boost potential growth and maintain financial stability for both advanced and emerging economies.

For China, the IMF warned of the risks from real estate market corrections and said that vulnerabilities would continue to rise without a change in the pattern of growth that relies on credit and investment.

It added it's crucial to implement the authorities' structural reforms that aim to strengthen the regulation and supervision of the financial sector, liberalize the deposit rate and use interest rates instead of quantitative targets for the implementation of monetary policy.

China's domestic rebalancing strategy, together with further exchange rate flexibility, would also contribute to global rebalancing, the IMF said.