October 7, 2014 / 1:02 PM / 3 years ago

IMF cuts growth outlook, warns on euro zone, Japan

WASHINGTON (Reuters) - The International Monetary Fund cut its global economic growth forecasts for the third time this year on Tuesday, warning of weaker growth in core euro zone countries, Japan and big emerging markets like Brazil.

International Monetary Fund (IMF) Director Christine Lagarde delivers her speech on the global economy ahead of the fall meetings of the IMF and World Bank at Georgetown University in Washington October 2, 2014. REUTERS/Gary Cameron

In its flagship World Economic Outlook report, the Washington-based lender cut its global growth expectations to 3.3 percent for this year and 3.8 percent for next year. In July it had expected growth of 3.4 percent in 2014 and 4 percent in 2015.

The IMF has now cut its current-year growth forecasts nine out of 12 times in the last three years as it consistently overestimated how quickly richer countries would be able to pull free from high debt and unemployment in the wake of the 2007-2009 global financial crisis.

It also lowered its expectations for longer-term potential growth, something its chief economist Olivier Blanchard called “the force from the future.”

“You have these forces from the past, the forces from the anticipated future ... and I think that explains the sequence of revisions that we’ve had,” Blanchard said in an interview.

The IMF again urged countries to carry out an array of structural reforms, such as improving labor market policies, fighting tax evasion and raising infrastructure spending, to avoid the risk of economic stagnation.

With interest rates already near rock-bottom in many advanced economies, it is harder to boost demand, Blanchard said, echoing the concerns of “secular stagnation” raised by former U.S. Treasury Secretary Lawrence Summers.

“On whether we’ll be able to ... increase demand enough to get to potential output, I think we don’t know yet,” Blanchard said at a news conference. “It may be difficult.”

The Fund’s gloomy projections set the stage for a gathering of the world’s top economic policymakers in Washington this week.

While richer countries like Britain and the United States are seeing stronger expansions, the IMF downgraded forecasts for the three biggest economies in the euro zone currency bloc - Germany, France and Italy - and said it was essential advanced economies maintain monetary stimulus.

It also lowered growth projections for Japan and Brazil, among others. The IMF said potential growth in emerging markets is now 1.5 percentage points lower than what it foresaw in 2011.

“There is a risk that the recovery in the euro area could stall, that demand could weaken further, and that low inflation could turn into deflation,” Blanchard said in a foreword to the report. “Should such a scenario play out, it would be the major issue confronting the world economy.”

The IMF now sees a 30 percent chance of the euro zone slipping into deflation over the next year, and nearly a 40 percent probability the currency bloc could enter recession.

MONETARY DIVERGENCE

Financial markets have been roiled by the diverging growth prospects in the United States, which is on track to tighten monetary policy next year, versus the ailing euro zone and a Japan that has dipped back into contraction.

The value of the U.S. dollar had surged by the end of last week for 12 successive weeks, the longest rally in 40 years.

U.S. Treasury Secretary Jack Lew appeared unfazed by the greenback’s appreciation, saying Washington supported other countries’ efforts to grow their economies.

Still, the euro zone will likely face pressure to do more to boost growth at the meetings this week, though Germany will caution against letting up on fiscal austerity.

The IMF warned that frothy financial markets could plunge suddenly once the U.S. Federal Reserve starts raising interest rates, with Blanchard saying it was unclear whether regulators were “up to the task” of mitigating the potential fallout.

The Fund also warned that geopolitical tensions between Russia and Ukraine, and in the Middle East, were increasingly posing risks to the global economy and could shock oil prices and cause wider trade and financial disruptions.

With loose monetary policy reaching its limits and cash-strapped governments struggling to boost public investment, the IMF urged all countries to pursue deeper reforms.

“The challenge ... is to go beyond the general mantra of ‘undertaking structural reforms’ to identify both the reforms that are most needed and the reforms that are politically feasible,” Blanchard said.

Reporting by Anna Yukhananov, additional reporting by Krista Hughes and Jason Lange; Editing by Andrea Ricci and Tim Ahmann

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