IMF warns of global stagnation as it cuts growth outlook again

Washington: A prolonged period of slow growth has left the global economy more exposed to negative shocks and raised the risk that the world will slide into stagnation, the IMF warned.
The International Monetary Fund (IMF) cut its world expansion forecast, as weak exports and slowing investment dim prospects in the US, a consumption-tax hike saps growth in Japan, and a slump in the price of everything from oil to wheat continues to hobble commodities producers. The world economy will grow 3.2 per cent this year, down from a projected 3.4 per cent in January, the IMF said on Tuesday in a quarterly update to its World Economic Outlook.
The weaker outlook is likely to weigh on finance ministers and central bankers from around the globe, who gather in Washington this week for spring meetings of the IMF and World Bank, as well as a Group of 20 session. The fund also cut its forecast for growth in 2017 to 3.5 per cent, down from 3.6 per cent three months ago.
“Growth has been too slow for too long,” IMF chief economist Maurice Obstfeld said in remarks prepared for a press briefing. “There is no longer much room for error.”
“But by clearly recognising the risks they jointly face and acting together to prepare for them, national policy makers can bolster confidence, support growth, and guard more effectively against the risk of a derailed recovery,” he said.
The IMF cited among the biggest risks as a “return of financial turmoil itself, impairing confidence and demand in a self-confirming negative feedback loop.”
‘Scarring effects’
“Another threat is that persistent slow growth has scarring effects that themselves reduce potential output and with it, consumption and investment,” the IMF said. “Consecutive downgrades of future economic prospects carry the risk of a world economy that reaches stalling speed and falls into widespread secular stagnation.”
The fund cited several political and geopolitical pressures, including the rise of populism in the US and Europe; the UK’s June referendum on whether to stay in the European Union; and large-scale refugee inflows that add to strains in Europe.
While growth forecasts for the US and euro area were marked down by 0.2 percentage point, the deepest reductions in advanced economies came in Japan.
The IMF cut its expansion estimate for the nation in half for 2016, to 0.5 per cent, and projects a 0.1 per cent contraction in 2017, compared with a previous forecast for 0.3 per cent growth. The fund cited recent strengthening of the yen and weaker emerging-market demand for the forecast cut, and the scheduled consumption-tax increase for the 2017 slide.
One bright spot: The IMF upgraded its China growth forecasts by 0.2 percentage point for this year and next, following signs of “resilient domestic demand” and growth in services that offset weakness in manufacturing.