“Policymakers everywhere need to increase efforts to ensure robust growth,” the report said.
These include structural reforms in the emerging markets, a medium-term plan to bring down the deficit in the United States and Japan, and measures to strengthen the banking system in Europe, the report said.
The IMF expects global economic growth of 3.1 percent in 2013 and 3.8 percent in 2014, 0.2 percentage points lower each year than its estimates three months ago.
“Growth almost everywhere is a bit weaker that we forecast in April, and the downward revision is particularly noticeable in emerging markets,” Olivier Blanchard, the fund’s head of research, said during a news conference on the report at IMF headquarters in Washington.
Blanchard identified three new risks for the world economy: slowing growth in China, Japan’s capacity to keep its debt at sustainable levels and the Federal Reserve’s expected decision to taper its bond-buying program in the United States. Other risks, he said, “are still present, the main ones related to Europe,” which is “still struggling.”
The IMF projects that the U.S. economy will grow 1.7 percent in 2013, the same as in 2012 and 0.2 percentage points lower than forecast in April. In 2014, U.S. growth is expected to be 2.7 percent, down from 2.9 percent. The slower growth, however, “is not particularly worrisome,” said Blanchard, attributing it to the “stronger than desirable fiscal consolidation,” referring to the U.S. government’s mandatory budget cuts known as sequestration.
“If fiscal consolidation had been weaker, then growth in the U.S. would be substantially higher,” Blanchard said.
The IMF expects the euro zone’s recession to deepen this year, contracting the economy by 0.6 percent in 2013, 0.2 percent lower than its previous estimates. In 2014, growth will be 0.9 percent, 0.1 percentage points lower than the IMF’s earlier estimate.
“High interest rates and fiscal consolidation are clearly playing a role in the periphery countries,” Blanchard said, while even in core countries such as France and Germany “there seems to be a general lack of confidence in the future.”
Emerging markets pose a particular worry, the IMF report said, as they face tighter financial conditions and access to credit, in part due to the prospective end the Fed’s bond-buying program, known as quantitative easing. The Fed’s policy change could reverberate across the world and hurt emerging markets by triggering capital outflows and currency depreciations.
“The Fed is acting appropriately for the U.S. market but the side-effect of that are higher rates and a stronger dollar, and that exacerbates the problems in the emerging markets,” said Jason Benowitz, a portfolio manager at Roosevelt Investment Group in New York. “There’s also a fear that if problems pick up in the emerging markets, this will flow back in the U.S.”
Blanchard said it is important for central banks to communicate their intentions clearly. “We are dealing with a new policy, quantitative easing, and exit from that policy hasn’t been tried before,” he said, adding that he’s confident “they’ll improve their communication as they learn how the markets react. They probably learned something during the past three weeks” of market nervousness.
The IMF report attributed the recent increase in volatility in the markets to uncertainty about the timing of the Fed’s exit. Volatility will decrease as investors come to terms with the fact that quantitative easing will eventually come to an end, Blanchard predicted.
The IMF expects the Chinese economy to grow 7.8 percent in 2013 and 7.7 percent in 2014, down from its previous forecast of 8.1 percent and 8.3 percent, respectively. Brazil’s economy will grow 2.5 percent in 2013 and 3.2 percent in 2014, down from 3 and 4 percent, respectively, according to the IMF. Russia’s growth projections were lowered to 2.5 and 3.3 percent, from 3.4 and 3.8 respectively.
To help move the global economy forward, the IMF said, surplus economies such as China will have to substantially increase domestic consumption while Germany lifts investment. At the same time, countries with large deficits must take steps to improve their competitiveness and boost demand.