An unexpectedly stubborn euro zone recession and weakness in Japan will weigh on global economic growth this year before a rebound in 2014 that should deliver the fastest expansion since 2010, the International Monetary Fund said on Wednesday.
The IMF trimmed its 2013 forecast for global growth to 3.5 per cent from the 3.6 per cent it projected in October, but said it looked for a 4.1 per cent expansion in 2014 if a recovery takes a firm hold in the euro zone. It said the world economy grew 3.2 per cent last year.
Healthy global growth rates of above of above 4 per cent were last seen in 2010, when output expanded 5.1 per cent as the global financial crisis eased.
The IMF said activity in advanced economies would likely remain weak this year with growth of just 1.4 per cent before strengthening to 2.2 per cent in 2014. In October, it projected developed economies would expand 1.5 per cent in 2013.
“Policy actions have lowered acute risks in the euro area and the United States,” the IMF said in an update of its World Economic Outlook. “However, downside risks remain significant, including renewed setbacks in the euro area and risks of excessive near-term fiscal consolidation in the United States.”
The United States is due to run out of room under a self-imposed borrowing limit of $16.4-trillion (U.S.) some time between mid-February and early March.
Republicans, who want to use the need to raise the debt ceiling as leverage to exact deep spending cuts, have signalled a willingness to pass a nearly four-month extension of the debt limit, defusing immediate fears of a damaging U.S. debt default but keeping a longer-term threat alive.
The IMF said the U.S. economy was set to expand 2 per cent this year, with growth rising above trend in the second half of this year and reaching 3 per cent in 2014.
“The priority is to avoid excessive fiscal consolidation in the short term, promptly raising the debt ceiling, and agree on a credible medium-term fiscal consolidation plan, focused on entitlement and tax reform,” it said.
The IMF said a prolonged stagnation in the euro zone is a threat especially if the currency bloc fails to complete fiscal and banking reforms.
The IMF said Japan’s economy is likely to manage 1.2-per-cent growth this year, helped by fiscal stimulus, an easing of monetary policy and a weaker yen, But it warned that growth was likely to slow to 0.7 per cent in 2014.
It urged Tokyo to adopt a more ambitious easing of monetary policy and a “credible” medium-term plan to tighten its budget.
Meanwhile, growth in emerging and developing economies should strengthen to 5.5 per cent this year and 5.9 per cent in 2014, the IMF said, adding that supportive policies had helped boost growth although weak demand from trading partners would still be a problem.
The pace of growth in China was set to increase to 8.2 per cent this year and 8.5 per cent in 2014, up from 2012 but still lower than the 10 per cent growth rates of 2010, the fund said.
Developing Asia, including China and India, will remain the fastest-growing region in the world, according to IMF forecast, with growth of 7.1 per cent this year and 7.5 per cent in 2014.
Africa, with growth likely around 5.8 per cent this year and 5.7 per cent next year, is the world’s second-fastest growing.