IMF sees higher global growth, but warns of low inflation

Tuesday 21 January 2014 16.42
IMF's latest 'World Economic Outlook predicts growth of 3.7% this year
IMF's latest 'World Economic Outlook predicts growth of 3.7% this year

The International Monetary Fund has raised its global growth forecasts for the first time in nearly two years amid rising demand and inventories in advanced economies.
              
But the IMF warned that richer nations were still growing below full capacity, and added the spectre of deflation to its long list of risks that could derail the nascent recovery.
              
In an update to its "World Economic Outlook," the IMF predicted 3.7% global economic growth this year, 0.1 percentage points higher than its October projections, and sees growth of 3.9% in 2015.
              
It forecast higher growth in advanced economies but kept its outlook unchanged for the developing world, where higher exports to rich nations will be offset by weak demand at home.

"There will be more growth rotation from emerging market economies to advanced economies in 2014-15," Olivier Blanchard, the IMF's chief economist, said in a statement.
              
The US is likely to be one of the global bright spots, after a budget deal in Congress reduced some of the government spending cuts that had weighed on domestic demand.
              
US data last month showed a pile-up in business inventories, the most since 1998, helped boost third quarter GDP, and the IMF expects domestic demand to lift growth to 2.8% in 2014.
              
The IMF also saw a rosier outlook for Britain, amid cheap credit and greater confidence, boosting its forecast for growth to 2.4% in 2014 from 1.9% in October.

Japan's prospects also surprised to the upside, as the IMF predicted further fiscal stimulus should help offset some of the impact from a higher consumption tax planned for this spring.
              
Japan launched an ambitious economic programme last year to shock the economy of out of nearly two decades of deflation.
              
The IMF warned other rich nations now risk the same problem of sluggish price growth, which can happen when economies linger well below their full potential.
              
"It also raises the likelihood of deflation in the event of adverse shocks to activity," the IMF said.
              
A falling spiral of prices would weaken demand by making cash more valuable over time, discouraging consumption. It also increases the value of debt, a big problem for highly indebted places like the US and the euro zone.

There is as high as a one-in-five chance that prices could start to fall in the euro zone, the IMF's chief economist said today. 

"Our model gives a 10-20% probability to inflation turning negative in the euro zone," Olivier Blanchard told reporters on a conference call.

The IMF urged central banks to avoid raising interest rates too soon while growth remains fragile, and called on the European Central Bank in particular to help sluggish demand by boosting credit growth as countries like Portugal and Greece continue to face weak demand.

Bank lending has decreased in many crisis-ridden southern European countries. But banks had previously used the bulk of cheap loans from the ECB to buy government bonds instead of loaning to the real economy, showing the limits of monetary policy.
              
The IMF warned that some developing countries, especially those with large current account deficits or domestic weaknesses, could be hit hard by capital outflows this year as the Federal Reserve begins to scale back its pace of US asset purchases. 

The IMF urged such economies to let their exchange rates depreciate, or consider tighter monetary policy or stronger regulation or supervision.
              
Central banks may not have much room to act in emerging markets, many of which are growing close to full capacity. For such countries, "the main policy approach for raising growth must be to push ahead with structural reform," the IMF said.
              
It particularly singled out China, calling on the world's second-largest economy to move more quickly towards consumption-led growth, and away from investment.
              
After 30 years of sizzling economic growth, often in the double digits, that lifted many millions of Chinese out of poverty but also devastated the environment, China wants to change tack by embracing sustainable and higher-quality development.
              
That means reducing government intervention to allow financial markets to have a bigger say in allocating resources, and promoting domestic consumption at the expense of investment and exports.
              
As the changes start to take effect, the IMF expects China's economy to grow 7.5% this year, and 7.3% the next, which would be some of the lowest rates of expansion in over a decade.