IMF cuts global growth forecast as US expansion weakens

Reduces 2013 projection for US to 1.7% growth from 1.9% in April

World economic growth will struggle to accelerate this year as a US expansion weakens, China's economy levels off and Europe's recession deepens, the International Monetary Fund said.

Global growth will be 3.1 per cent this year, unchanged from the 2012 rate, and less than the 3.3 per cent forecast in April, the Washington-based fund said on Tuesday, trimming its prediction for this year a fifth consecutive time. The IMF reduced its 2013 projection for the US to 1.7 per cent growth from 1.9 per cent in April, while next year's outlook was trimmed to 2.7 per cent from three per cent initially reported in April.

"Downside risks to global growth prospects still dominate," the IMF said in an update to its World Economic Outlook. It cited "the possibility of a longer growth slowdown in emerging market economies, especially given risks of lower potential growth, slowing credit, and possibly tighter financial conditions if the anticipated unwinding of monetary policy stimulus in the US leads to sustained capital flow reversals."

The fund urged central banks in wealthy nations facing low inflation and economic slack to keep injecting stimulus until recovery is entrenched, saying rising longer-term interest rates have hurt emerging markets the most. The developing economies need to be alert for financial risks if the "anticipated unwinding" of the US Federal Reserve's bond-buying program reverses capital flows, the IMF said.

China's growth
The IMF projected China's growth will be 7.8 per cent in 2013, down from an eight per cent April projection, and the 17-country Euro area will shrink 0.6 per cent as the economies of France, Italy and Spain contract. The IMF projected a 0.3 per cent contraction for the Euro area in April.

The IMF report says growth will weaken in emerging markets including China as external demand growth has slowed and advanced economy longer-term interest rate volatility has risen.

The US is held back by fiscal contraction and Europe will remain mired in recession on the heels of its debt crisis, according to the report.

Plans for record monetary easing and increased private demand boost the fund's improved forecasts for Japan, the world's third-largest economy, upgraded to two per cent growth this year from a 1.6 per cent projection in April.

Global economy
The forecast for global growth next year is 3.8 per cent, down from 4 per cent in the IMF's April projections.

In the report, the fund said advanced economies must continue to avert risks - in the US, by making timely increases to the debt ceiling and in Europe, by continuing a "do what it takes" approach to mitigate financial fragmentation.

Monetary stimulus "should continue until the recovery is well-established," the report states. The US, Japan and European Central Bank have all pursued record stimulus in an effort to boost their economies.

The Euro region is still facing fallout from its financial crisis. European governments agreed this week to release euro 3 billion ($3.9 billion) of aid for Greece, seeking to create enough financial calm to prevent another debt-crisis showdown until after Germany's elections in September. The fund sees a contraction deepening in Italy to 1.8 per cent and France will shrink 0.2 per cent, according to Tuesday's report.

Euro area
The IMF said the Euro area should work towards a fuller banking union, and push forward policies to support demand and reform product and labour markets in order to bolster growth and job creation.

Germany's economy is forecast to grow 0.3 per cent, less than the 0.6 per cent expansion forecast in April. The country must pursue policies that will sustainably raise investment, the fund said, while China must pursue structural reforms that boost consumption.

Developing economies are seen growing five per cent this year, compared with 1.2 per cent for their advanced counterparts, according to the report.

The number is less than the 5.3 per cent expected as of April, though still faster than 4.9 per cent expansion last year, according to the IMF.

Brazil's 2013 growth outlook was dropped to 2.5 per cent from three per cent growth, while Russia's forecast was downgraded to 2.5 per cent from 3.4 per cent expansion, Tuesday's report said.