IMF cuts world growth outlook amid Ukraine worries

The International Monetary Fund cut its growth forecast for the global economy Tuesday, pointing to the threat from the Ukraine crisis and the slowdown in major emerging economies. The IMF said the world's two largest economies, the United States and China, continue to anchor expected growth of 3.6 percent this year and 3.9 percent in 2015. But those figures were rolled back by 0.1 percentage points from January's forecast, when the Fund was more optimistic before Ukraine plunged into crisis with an anti-government revolt and Russia's annexation of Crimea. That has exacerbated Russia's sharp economic downturn, with the country facing economic sanctions from the West, and the Fund worries the impact could spread beyond the region. Even so, the world's crisis lender said the global economy had improved since last year. "The recovery which was starting to take hold in October is becoming not only stronger, but also broader," said chief Fund economist Olivier Blanchard. "The various brakes that hampered growth are being slowly loosened. Fiscal consolidation is slowing, and investors are less worried about debt sustainability." - Emerging economies dragging - But the Fund said that sharp downturns in other leading emerging-market economies, including Brazil, South Africa and Turkey, were also drags on global output. It said this "worrying development" was rooted in domestic policy shortcomings, tighter financial conditions both domestically and internationally, and a pullback in investment. Those economies remain especially vulnerable from turbulence that started with the US Federal Reserve's slow tightening of monetary conditions, which has driven a rise in interest rates for the world and has pulled capital away from riskier markets. The assessment came in the IMF's newest World Economic Outlook report, released ahead of the annual spring meetings in Washington of the Fund and the World Bank that begin on Thursday. It outlines key issues of concern to the world's central bankers, finance ministers and economic planners as they try to weather conflicting global trends of tightening in the US and worries about too little growth and deflation in Europe and Japan. Without prescribing solutions, the report highlights the inability of the central banks in those key economies to do much more to stimulate investment and hiring. That raises the sensitive issue of whether strained governments should forego deficit-slashing austerity programs and spend more to boost economies. Compared with one year ago, the United States has now become a relative bright light for the world, with the IMF saying it will grow 2.8 percent this year and 3.0 percent next, unchanged from its January prediction despite the beating the US economy took from severe winter weather. One key advance is the end of the US political battle over the budget, which put the country on the edge of default on its debts and spread uncertainty throughout the world economy. The suspension of the country's borrowing limit until next year -- necessary to keep funding the US deficit in the short term -- has restored confidence in Washington's economic management, and now the Fund sees the US pushing ahead, though still fighting to get demand back to a more normal, self-sustaining level. - China to weather turbulence - China, too, continues to pull its weight, despite a sharp slowdown. The IMF's forecasts are unchanged, seeing growth at 7.5 percent this year and 7.3 percent next, on the belief that Beijing will keep a firm hand on the financial frailties coming to the surface now. "This projection is predicated on the assumption that the authorities gradually rein in rapid credit growth and make progress in implementing their reform blueprint," the IMF said. "The likelihood of a hard landing in China after overinvestment and a credit boom continues to be small because the authorities should be in a position to limit the damage." However, it warned, if China does not handle well the problems in the financial system, "spillovers to the rest of the world, including through commodity prices, could be significant." The eurozone in particular is struggling to address extremely low inflation with little room to shift monetary policy, and the Fund has recently suggested that some stimulus, along the lines of the US quantitative easing, could be necessary. Demand growth is weak, companies are still laden with debt and credit and credit demand is tepid, keeping the outlook for growth in the 18-nation bloc at 1.2 percent this year and 1.5 percent in 2015, but increased by one-tenth point. Japan is in a similar situation, its stimulus still facing challenges, including deflation and last week's hike in consumption taxes, which could send the economy into recession this quarter. The forecast for growth this year was cut to 1.4 percent from 1.7 percent, and only 1.0 percent next year. The most serious problem the IMF sees is the one that has Russia at odds with the West over Ukraine. Further turmoil could spark a new flight to safety in global financial markets, and intensified sanctions and counter-sanctions could disrupt trade and finance, including in markets for oil, gas and food commodities, including corn and wheat. The IMF slashed its prediction for Russian growth to 1.3 percent this year, compared with 1.9 percent in January. "The near-term growth outlook for Russia, already weakened, has been further affected by these geopolitical tensions," the IMF said. "Investment had already been weak, reflecting in part policy uncertainty."