Picture: THINKSTOCK
Picture: THINKSTOCK

WASHINGTON — World economic growth will struggle to accelerate this year as US expansion weakens, China’s economy levels off and Europe’s recession deepens, the International Monetary Fund (IMF) said on Tuesday.

Global growth will be 3.1% this year, unchanged from last year and less than the 3.3% forecast in April, the Washington-based fund said on Tuesday, trimming its prediction for a fifth consecutive time.

The IMF reduced its projection for the US to 1.7% growth this year from 1.9% in April, while next year’s outlook was trimmed to 2.7% from 3% initially reported in April.

"Downside risks to global growth prospects still dominate," the IMF said in an update to its World Economic Outlook. It cited "the possibility of a longer growth slowdown in emerging market economies, especially given risks of lower potential growth, slowing credit, and possibly tighter financial conditions if the anticipated unwinding of monetary policy stimulus in the US leads to sustained capital flow reversals".

The IMF urged central banks in wealthy nations facing low inflation and economic slack to keep injecting stimulus until recovery is firmly entrenched, saying rising longer-term interest rates have hurt emerging markets most. The developing economies need to be alert to financial risks if the "anticipated unwinding" of the US Federal Reserve’s bond-buying programme reverses capital flows, it said.

The IMF projected China’s growth will be 7.8% this year, down from an 8% April projection, and the 17-country eurozone will shrink 0.6% as the economies of France, Italy and Spain contract. The IMF projected a 0.3% contraction for the eurozone in April.

The IMF report says growth will weaken in emerging markets including China as external demand growth has slowed and advanced economy longer-term interest rate volatility has risen. The US is held back by fiscal contraction and Europe will remain mired in recession on the heels of its debt crisis, the report says.

Plans for record monetary easing and increased private demand bolstered the IMF’s forecasts for Japan, the world’s third-largest economy, upgraded to 2% growth this year from a 1.6% projection in April.

The forecast for global growth next year is 3.8%, down from 4% in the IMF’s April projections.

In the report, the fund said that advanced economies should continue to avert risk — in the US, by making timely increases to the debt ceiling and in Europe, by continuing a "do what it takes" approach to mitigate financial fragmentation.

Monetary stimulus "should continue until the recovery is well-established". The US, Japan and European Central Bank have all pursued record stimulus in an effort to lift their economies.

The eurozone is still facing fallout from its financial crisis. European governments agreed this week to release €3bn ($3.9bn) of aid for Greece, seeking to create enough financial calm to prevent another debt-crisis showdown until after Germany’s September election.

The fund sees a contraction deepening in Italy to 1.8% and France will shrink 0.2%. It said the eurozone should work towards a fuller banking union and push forward policies to support demand and reform product and labour markets to bolster growth and job creation.

Germany’s economy is forecast to grow 0.3%, less than the 0.6% expansion forecast in April. The country must pursue policies that will sustainably raise investment, the fund said, while China must pursue structural reforms that boost consumption.

Bloomberg