IMF says world economy in ‘low gear’ as it cuts global growth forecasts

Global growth is in “low gear” as the emerging economies of China, India, Russia and Mexico – previously the engines of the world recovery – turn sluggish, the International Monetary Fund said Tuesday.

The Washington-based lender said advanced economies such as the US and UK were recovering from the worst recession in several generations, but the pace was too slow and political shenanigans in Washington were muddying the outlook.

"Global growth is still weak, its underlying dynamics are changing, and the risks to the forecast remain to the downside," the IMF warned in its World Economic Outlook, a twice-yearly assessment of the health of the global economy.

Against that uncertain backdrop, the IMF cut its forecasts for global economic growth to 2.9 percent for 2013 and 3.6 percent for 2014, down from its July estimates of 3.1 percent and 3.8 percent respectively.

That compares with 5.4 percent in 2007, before the global recession hit.

The IMF also lowered its forecasts for the US to 1.6 percent in 2013, from 1.7 percent, and 2.6 percent in 2014, down from 2.8 percent, noting growth in the world's largest economy has been “hobbled” by “excessive” across-the-board budget cuts while political bickering was fueling uncertainty about the outlook.

"Politics is creating uncertainty about both the nature and the strength of the fiscal adjustment,” the IMF said.

“The sequester is a bad way to consolidate, and conflicts around increasing the debt ceiling could lead to another bout of destabilizing uncertainty and lower growth."

Failure to raise the debt ceiling, IMF Chief Economist Olivier Blanchard noted, would lead to “an extreme fiscal consolidation and (would) almost surely derail the US recovery” … and “could seriously damage the global economy.”

He also said that the US government shutdown, which is currently in its second week, would have limited consequences if it is not prolonged, but could derail the US recovery if it lasts for longer.

Emerging economies, which still account for much of global growth, are seen growing 4.5 percent this year, 0.5 percentage point less than three months ago.

The IMF said economies such as China, India, Brazil, Russia and Mexico have been hit hard by the prolonged downturn in Europe and the US as well as capital outflows triggered by the Federal Reserve’s plan to wind down its massive bond-buying program.

But some of their problems were also self-inflicted, the IMF noted, pointing to efforts to control currency values and difficult investment systems.

China, the world’s second-largest economy, is expected to grow 7.6 percent in 2013, 0.2 percentage point lower than July’s forecast. Growth is seen at 7.3 percent in 2014, down from 7.7 percent three months ago.

The IMF warned Chinese economic growth could “slow considerably” if authorities do not step up efforts to “rebalance the economy toward consumption” and reduce the country's excessive reliance on exports and government-backed investment.

Russia, which the IMF said was overly dependent on oil exports, was expected to growth 1.5 percent this year instead of 2.5 percent forecast back in July. In 2014, growth is seen at 3 percent, down from the previous estimate of 3.3 percent.

India, which saw its currency plunge to record lows against the dollar in recent months, pushing it to the brink of a balance-of-payments crisis, will grow 3.8 percent this year, down from July’s forecast of 5.6 percent, and 5.1 percent in 2014 instead of 6.3 percent.

Mexico will grow 1.2 percent this year and 3 percent next, down from July’s prediction of 2.9 percent and 3.2 percent respectively.

There were a couple of bright spots in the report. The IMF upgraded its UK growth forecast for this year to 1.4 percent from July’s estimate of 0.9 percent. For next year, the UK is expected to expand by 1.9 percent, up from the previous forecast of 1.5 percent.

The euro zone is also expected to contract at a slower than expected pace this year – 0.4 percent against July’s forecast of 0.6 percent. And the IMF expects the 17-country euro area to grow 1 percent in 2014, up from its previous projection of 0.9 percent growth.