IMF cuts global growth outlook, warns of stagnation risk in rich nations

WASHINGTON/MEXICO CITY (Reuters) - The International Monetary Fund on Thursday chopped its 2014 forecast for global economic growth to take into account weakness early in the year in the United States and China, the world's two biggest economies.

The IMF warned that only some of the factors leading to the reduction were temporary, and richer nations in particular faced the risk of economic stagnation unless they took steps to foster sustainable growth.

In an update to its World Economic Outlook report, the IMF said the global economy should expand 3.4 percent this year, 0.3 percentage points below what it predicted in April. Growth should still speed up to 4 percent next year, it said, unchanged from what it predicted earlier this year.

But the Fund said a robust global recovery from the deep financial troubles of 2007-09 was still not assured, and geopolitical risks from the crises in the Middle East and Ukraine could dent growth further.

"Robust demand momentum has not yet emerged despite continued very low interest rates and easing of brakes to the recovery, including from fiscal consolidation or tight financial conditions," the IMF said, adding that all major advanced economies would do well to keep policy rates low for now.

Central banks in the United States, Japan, the euro zone and Britain have all sharply lowered rates to boost economic growth and pledged to keep them there for longer to let the recovery take hold.

The low rates have spurred markets higher, and valuations could be a bit "optimistic," the IMF's chief economist Olivier Blanchard said.

While unemployment fell more quickly than economists had expected in the United States and Britain, wage growth and consumer confidence still linger below pre-crisis levels in many richer countries. At the same time, emerging markets are still dealing with tighter financial conditions and reduced future growth prospects.

Speaking at a news conference in Mexico City, Blanchard urged countries to do more to boost growth via structural reforms and investing in infrastructure.

The IMF said bright spots in the global economy included growth pick-ups in Japan, Germany, Spain and the United Kingdom. But they were overshadowed by weak growth in the United States in the first half of the year, as well as a slowdown in domestic demand in China, where the government sought to tamp down lending and the housing market cooled.

Russia also dragged down the overall forecasts, as its economy is expected to grow just 0.2 percent this year due to sanctions and other impacts of the Ukraine crisis.

In the latest volley, the United States last week slapped sanctions on two large Russian energy firms and two banks, in addition to some defense firms, moves Blanchard said could push the country into recession.

In fact, out of the BRICS countries - Brazil, Russia, India, China and South Africa - only India avoided an IMF ratings downgrade, as business sentiment recovers after the country's election.

(Reporting by Anna Yukhananov in Washington and Michael O'Boyle in Mexico City; Editing by Andrea Ricci and Simon Gardner)