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IMF Cuts 2016 Global Economic Growth Outlook to 3.2%

Dimmer forecast comes as world’s finance officials prepare to meet


WASHINGTON—The world economy is increasingly at risk of stalling, the International Monetary Fund warned Tuesday as it once again cut its forecast for global growth prospects.
The IMF said it was forced to downgrade its growth forecast for this year to 3.2%, down by 0.2 percentage point from its projection issued in January. China’s slowdown and weak commodity prices are taking a deeper toll on emerging markets than expected and rich countries are still struggling to escape the legacies of the financial crisis, the fund said.
The downward revision is the fourth straight cut in a year, putting world economic growth just a hair over last year’s 3.1% and only marginally above the 3% rate the IMF has previously considered a technical recession globally.
“Consecutive downgrades of future economic prospects carry the risk of a world economy that reaches stalling speed and falls into widespread secular stagnation,” IMF Chief Economist Maurice Obstfeld said as the fund launched its flagship report. The IMF is worried such stagnation could further stifle investment, smother wage growth, curb employment and push government debt to unsustainable levels in some countries.
“Does that culminate in some crisis and recession? It’s not clear at all that would be the case,” Mr. Obstfeld said. “But we definitely face the risk of going into doldrums that could be politically perilous,” he said.
The increasingly dour outlook sets the tone for the semiannual IMF and World Bank meetings this week in Washington, where financial leaders from around the globe will gather to take stock of the global economy.
Recessions in Russia and Brazil are proving to be deeper and longer than the IMF anticipated after political problems compounded the effects of a plunge in commodity prices. Dozens of other oil exporters—from Venezuela to Canada, Saudi Arabia to Nigeria—are also facing sharp slowdowns.
The IMF upgraded China’s growth forecast this year by 0.2 percentage point to 6.5% as the service sector compensated for a downturn in manufacturing. But the country’s deceleration continues to hit trade partners around the world. Jitters about the fate of the world’s second-largest economy have roiled global markets in the past year.
China’s slowdown, along with the commodity-price downswing and the U.S. Federal Reserve’s move to start raising interest rates, packed a triple-punch to most emerging and developing economies around the world. Investors pulled out their cash in droves, pushing down exchange rates and equity prices, and raising bond premiums. China’s troubles also slashed trade and investment in many of those countries and spurred broader concerns about growth prospects in advanced economies.
The IMF said Beijing’s plans to boost output and overhaul its economy aren’t sufficient to address long-term growth concerns.
“Our concern is that some of the stimulus is likely to take the form of higher credit growth, more support for sectors that are…declining and not that productive.” Mr. Obstfeld said. “And so we worry about the quality of growth more than the quantity of growth.”
Those comments give credence to investors who are skeptical that authorities will be able to manage a smooth transition away from the country’s credit-fueled growth model toward one based more on markets and consumption.
Europe and Japan, meanwhile, can’t seem to escape from low growth despite aggressive central-bank actions that have pushed rates into uncharted negative territory.
“Persistent slow growth has scarring effects that themselves reduce potential output and with it, consumption and investment,” the IMF said.
A strong dollar, dimmer global growth prospects and soft oil prices also sapped output in the world’s largest economy, the U.S. The IMF shaved 0.2 percentage point off its U.S. growth forecast for the year to 2.4%.
Although global markets have recently clawed back some of the losses recorded early this year, the IMF said investors shouldn’t be complacent about the myriad risks threatening to derail an increasingly frail global economy.
Greece’s long-festering debt problems, a mounting refugee crisis and the U.K.’s potential exit from the European Union risk wreaking havoc on the eurozone and beyond, the IMF said. A misstep by Beijing could spark global market turmoil. Renewed stress in emerging markets, especially given rising corporate debt problems, could create financial stress, sovereign debt concerns, further exchange-rate depreciations and greater capital flight. Weak oil prices could spell deeper troubles ahead for oil exporters.
Amid those threats, the IMF also cut its global forecast for next year by 0.1 percentage point to 3.5%. But even that limited acceleration is based on a host of assumptions, including a smooth Chinese economic rebalancing, a pickup in commodity exporters and emerging markets more broadly.
“The current diminished outlook and associated downside possibilities warrant an immediate response,” Mr. Obstfeld said. “There is no longer much room for error.”
For the IMF, that means more easy money from central banks, new government-funded infrastructure investment and economic overhauls to raise productivity, competitiveness and investor confidence.
Although central banks are pressing the easy-money accelerator, other financial leaders have so far failed to deliver on promises to boost economic growth through coordinated measures.
Still, the IMF said policy makers should draft contingency plans for a joint response to revive growth should the global economy stagnate further. In one downside scenario that assumed a steady decline in global growth, the IMF suggested budget outlays of 1.5% of GDP in rich countries and 1% of GDP in emerging markets should help jolt the world economy out of its malaise.

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