The global economy is set to continue expanding at a slower pace as financial and geopolitical uncertainties increase and the prolonged weak growth pose greater risks to the outlook, the International Monetary Fund said Tuesday.
In its latest World Economic Outlook, the Washington-based lender cut the global economic growth forecast for this year to 3.2 percent from 3.4 percent projected in January. The outlook for next year was lowered to 3.5 percent from 3.6 percent.
"Lower growth means less room for error," IMF Economic Counsellor and Director of Research Maurice Obstfeld said. "Persistent slow growth has scarring effects that themselves reduce potential output and with it, demand and investment."
More aggressive policy actions to lift demand and supply potential could boost growth, the report said. The current diminished outlook calls for an immediate, proactive response, Obstfeld said.
The IMF report stressed on the need for a more potent policy mix — a three-pronged policy approach based on structural, fiscal, and monetary policies.
"If national policymakers were to clearly recognize the risks they jointly face and act together to prepare for them, the positive effects on global confidence could be substantial," Obstfeld added.
The growth projection for advanced economies for this year was trimmed to 1.9 percent from 2.1 percent. The outlook for next year was lowered to 2 percent from 2.1 percent.
The recovery is hampered by weak demand, partly held down by unresolved crisis legacies, as well as unfavorable demographics and low productivity growth, the IMF said.
The growth forecast for the U.S. was lowered to 2.4 percent for this year and the outlook for next year was reduced to 2.5 percent.
Euro area growth projection for this year was trimmed to 1.5 percent and the forecast for next year was cut to 1.6 percent. The IMF also lowered the growth projections for the big four of the currency bloc - Germany, France, Italy and Spain.
The U.K., which is set to hold a referendum on its EU membership in June, saw its growth forecast for this year trimmed to 1.9 percent from 2.2 percent. The projection for next year was left unchanged at 2.2 percent.
Growth forecasts for Japan was trimmed sharply to 0.5 percent this year and -0.1 percent next year, when a consumption tax hike takes effect.
The emerging and developing economies had their growth forecast for this year lowered to 4.1 percent from 4.6 percent. Within this group, Russia and Brazil would be the worst performers next year with significant contractions in economic output.
In contrast, China's growth forecast was boosted to 6.5 percent and 6.2 percent for this year and next, respectively. India remains a bright spot, the lender reiterated, while leaving the growth projections for both years unchanged at 7.5 percent.
Prospects across emerging market and developing countries remain uneven and generally weaker than over the past two decades, the IMF said.
Regarding the global economy, the IMF said, "In the current environment of weak growth, risks to the outlook are now more pronounced."
The risks include a return of financial turmoil, protracted period of low oil prices, sharper slowdown in China, non-economic shocks such as geopolitical conflict, terrorism, epidemics, political discord and refugee flows.
Meanwhile, the recent decline in oil prices may boost demand in oil-importing countries more strongly than currently envisaged, partly due to consumers' hopes that prices will remain lower for longer.
Aggressive policy actions to boost growth should include labor market and product market reforms in advanced economies, the report said. Fiscal reforms suggested include reducing inefficient taxes on labor, increasing public spending on research and development, and labor market policies such as job training programmes.
Monetary policy should remain accommodative in many advanced economies to support economic activity and lift inflation expectations. In emerging and developing economies, monetary policy should tackle the impact of weaker currencies, the IMF said.
The lender also noted that exchange rate flexibility must be used, where feasible, to cushion the impact of terms of trade shocks. The report also recommended financial sector reforms.
"Policymakers also need to make contingency plans and design collective measures for a possible future in case downside risks materialize," the report warned.
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