IMF raises global growth forecast

“Global growth is expected to increase in 2014 after having been stuck in low gear in 2013,” says the IMF in its latest World Economic Outlook update. The report notes that global activity and world trade picked up in the second half of 2013, and that it expects this to carry over into 2014. “In advanced economies, final demand has increased broadly as expected. In emerging markets, a rebound in exports was the main driver of better activity, while domestic demand generally remained subdued except in China,” it notes.

“There will be more growth rotation from emerging market economies to advanced economies in 2014–15,” said Olivier Blanchard, the IMF’s chief economist and director of the IMF’s research department.

Indeed, the tick up in the IMF forecast is based on its brighter view for the world’s advanced economies. It has raised its forecast on their global growth prospects by 0.2% to 2.2% GDP growth this year; while, at the same time, trimming its forecast for 2015 by the same amount, to 2.3%.

In particular, the IMF has raised its 2014 forecast for the UK by 0.6%, Spain by 0.4%, and the U.S. by 0.2% to 2.8%. For Canada, the IMF has nudged its 2014 call up by 0.1% to 2.2% growth, and trimmed its’ 2015 forecast by 0.1% to 2.4%.

It notes that the U.S. growth pickup is partly due to a reduction in the fiscal drag that will result from the recent budget agreement. But, it notes that the budget agreement also implies that most of the cuts slated for fiscal 2015 will remain in place, instead of being reversed, as the IMF assumed. As a result, “growth in 2015 is now expected to be only slightly higher than in 2014,” it says. As a result, it has trimmed its’ 2015 call for the U.S. by 0.4% to 3.0%.

Additionally, the IMF notes that the euro area is turning the corner from recession to recovery; and, while growth in Japan is expected to decelerate in 2014–15, after a strong pickup in 2013, the slowing will be more gradual than previously expected due to temporary fiscal stimulus.

Next: Emerging markets
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Emerging markets

Emerging market and developing economies are expected to see an increase in growth to 5.1% in 2014 and to 5.4% in 2015, it says.

While the balance of risks is shifting, the IMF says that important downside risks to the global growth outlook are still a concern. New risks include the prospect of very low inflation in advanced economies, especially in the euro area.

“If people’s expectations of future inflation drift down in response, actual inflation could turn out even lower than projected. That would increase real debt burdens and raise real interest rates, hampering growth. And the likelihood of deflation in the event of adverse shocks to activity would also increase,” it warns.

For emerging market economies, increased financial market and capital flow volatility remain a concern, particularly amid news that the U.S. Federal Reserve Board expects to begin tapering bond purchases in 2014, the IMF adds.

“Strengthening global growth does not mean that the global economy is out of the woods,” the IMF cautions, adding that ensuring robust growth and managing vulnerabilities remain policy priorities for all countries. In particular, it warns the U.S. Fed from prematurely withdrawing monetary stimulus; and, counsels the European Central Bank to consider additional measures to ensure bank balance sheets are properly repaired.

For emerging markets, it stresses that they must carefully manage the risks from potential capital flow reversals, and that exchange rates should be allowed to depreciate in response to deteriorating external funding conditions.