The International Monetary Fund has warned that the global recovery is on precarious footing, as rising geopolitical tensions and the prospect of tighter monetary policy in the US risk dampening the outlook for global growth.
In a document prepared ahead of this week’s G20 meeting of finance ministers and central bank governors in Australia, the IMF said that growth in the first half of this year was weaker than it had predicted in April. The Fund signalled it is likely to cut its next batch of forecasts which will be released in October.
The Fund’s assessment is the latest sign that mounting tensions in Ukraine and the Middle East have worsened the prospects for the global economy. This week, the Organisation for Economic Co-operation and Development cut its forecasts for 2014 growth for all large economies except India.
“While the recovery is projected to regain some strength in the reminder of 2014 and 2015, it would be weaker than foreseen in the spring,” the IMF said.
The Fund expects growth to accelerate in advanced economies, with the US and the UK enjoying the strongest rebound. However, the outlook for the eurozone and Japan is more uncertain, as inflation remains below central bank targets.
The outlook for emerging markets remains vulnerable to the normalisation of monetary policy in the US, the IMF warns. With the Federal Reserve expected to end its asset purchases in October and moving closer to raising interest rates, emerging markets should foresee tighter financial conditions. In particular, the Fund expects to lower its growth forecasts for Latin America, as business and consumer confidence continues to decline in Brazil and Argentina suffers from the consequences of its default in June.
The heightening of geopolitical tensions and the reversal of monetary conditions in the US also poses a risk for investors, the IMF notes. While the outlook for global growth has weakened, volatility has fallen sharply as investors continue to purchase risky assets. This makes financial markets vulnerable to sudden swings.
The IMF believes that central banks in advanced economies should keep monetary policy loose as they seek to boost growth and bring inflation closer to their target. But to mitigate the risks for financial stability, the Fund believes the authorities should use macro-prudential tools.
“To mitigate financial stability risks from a prolonged period of low interest rates and prevent premature monetary tightening, macro-prudential tools should be the first line of defence,” the IMF said.
The IMF also encouraged emerging economies to pass structural reforms in order to reduce their vulnerability to shocks from the reversal of US monetary policy. Structural reforms are also necessary in richer economies to boost potential output, the IMF warns.
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