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IMF trims global growth outlook, warns of eurozone stagnation

Tuesday, October 7, 2014 - 22:00

[WASHINGTON] The International Monetary Fund warned of stagnation in advanced economies 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 it 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," it said.

The global crisis lender lowered its forecast for global growth this year to 3.3 per cent, 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 per cent growth, compared with 4.0 per cent 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 per cent 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 per cent this year and 1.3 per cent in 2015 - and Japan, slashed to 0.9 per cent this year and 0.8 per cent next year.

And while the forecasts for China, the second-largest economy, and East Asia generally were unchanged (for China 7.4 per cent this year, 7.1 per cent 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.

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.- AFP

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