By Judith Ugwumadu | 9 April 2014

The International Monetary Fund has cut its outlook for the world economy in 2014 pointing to low inflation in advanced economies, recent political strains in Ukraine and low growth in Japan and the euro area.

In its bi-annual World Economic Outlook, the fund predicted that the world economy would grow 3.6% this year and 3.9% in 2015, anchored by strengthening economic activities in the US. This marked a slight downgrade from the 3.7% it forecast in January, but would still be stronger than last year’s 3% growth. The IMF’s report comes ahead of its spring meeting with the World Bank later this week.

The IMF forecasted that, across advanced economies, growth would be 2.2% this year, up considerably from the 1.3% recorded in 2013, going on to reach 2.3% in 2015. Momentum in advanced economies would be considerably stronger this year than in emerging economies where growth is expected to be 4.9% this year, up from 4.7% last year, and hitting 5.3% in 2015.

The IMF said this weaker momentum was because of continued weak investment and a build up of external and public debt.

‘Many [emerging market] economies need a new round of structural reforms to increase growth,’ the report proposed. These include: investment in public infrastructure, removal of barriers to entry in product and services market, and in China, rebalancing growth away from investment toward consumption.’

 In advanced economies, downside risks were posed by low inflation and the possibility of protracted low growth, especially in the euro area and Japan, the report stated.

In Japan, policymakers need to deliver on the third ‘arrow’ of Abenomics – structural reforms to lift potential growth, the IMF said. It added that Japan’s economic activity is expected to get a boost from private investments and exports.

‘In the euro area, more monetary easing, including via unconventional measures, is recommended to sustain activity and help achieve the European Central Bank’s price stability objective,’ said the report.  

It explained that low inflation in the euro area threatened to reverse the progress and could lead to deflation, or falling wages and prices, making it more difficult to pay off debts. 

Also, near-term growth in Russia has been downgraded, reflecting its annexation of Ukraine last month. In emerging and developing Europe growth would decelerate in 2014 before recovering in 2015, reflecting changing external financial conditions, said the IMF.

The IMF urged policymakers in advanced economies to avoid a premature withdrawal of monetary reforms because of continued fiscal consolidation, large output gaps and low inflation.