IMF cuts global growth forecast, warns of stagnation risk

By David Lawder
WASHINGTON, April 12 (Reuters) - The International Monetary
Fund cut its global growth forecast for the fourth time in the
past year on Tuesday, citing China's slowdown, persistently low
oil prices and chronic weakness in advanced economies.
The Fund, whose spring meetings along with the World Bank
will be held in Washington this week, forecast that the global
economy would grow at 3.2 percent in 2016 compared to its
previous forecast of 3.4 percent in January.
In its latest World Economic Outlook, the Fund warned of
widespread stagnation risk and said weaker growth could leave
the global economy more vulnerable to shocks such as currency
depreciations or worsening geopolitical conflicts.
The Fund called on global policymakers attending the IMF and
World Bank meetings to take coordinated actions to boost demand
with structural economic reforms, fiscal stimulus where possible
and accommodative monetary policy.
"Lower growth means less room for error," IMF chief
economist Maurice Obstfeld said in a statement. "Persistent slow
growth has scarring effects that...reduce potential output and
with it, demand and investment."
The IMF cut Japan's growth forecast in half to 0.5 percent
in 2016 and said Brazil's economy would now shrink by 3.8
percent this year versus the previous forecast of a 3.5 percent
contraction as it struggles through its deepest recession in
decades. See TABLE:
Meanwhile, the United States, one of the relative bright
spots in the global economy, also saw its 2016 growth forecast
cut to 2.4 percent from 2.6 percent. The IMF said it anticipated
an increased drag on U.S. exports from a stronger dollar, while
low oil prices would keep energy investment weak.
The Fund raised China's growth forecast slightly to 6.5
percent this year, and 6.2 percent in 2017, partly due to
previously announced policy stimulus. But the IMF said it still
expects China's growth to continue to weaken as it transitions
to a consumer-driven economy.
"A sharper slowdown in China than currently projected could
have strong international spillovers through trade, commodity
prices, and confidence, and lead to a more generalized slowdown
in the global economy, especially if it further curtailed
expectations of future income," the IMF said in the World
Economic Outlook.
The new forecasts follow previous growth markdowns in July,
October and January.
Obstfeld said that global growth could easily weaken from
the latest IMF forecasts which could reinforce a deflationary
spiral of weak growth that erodes future output potential. He
said this phenomenon is known in some economic circles as
"secular stagnation."
He also noted that persistently lower growth could reinforce
a sense of economic inequality and encourage nationalistic,
protectionist policies, particularly in the euro area, which
could also reduce potential.