IMF cuts global growth forecast, warns of stagnation risk

The International Monetary Fund cut its global growth forecast for the fourth time in the past year on Tuesday, citing China’s slowdown, persistently low oil prices and chronic weakness in advanced economies.

The Fund, whose spring meetings along with the World Bank will be held in Washington this week, forecast that the global economy would grow at 3.2 percent in 2016 compared to its previous forecast of 3.4 percent in January.

In its latest World Economic Outlook, the Fund warned of widespread stagnation risk and said weaker growth could leave the global economy more vulnerable to shocks such as currency depreciations or worsening geopolitical conflicts.

The Fund called on global policymakers attending the IMF and World Bank meetings to take coordinated actions to boost demand with structural economic reforms, fiscal stimulus where possible and accommodative monetary policy.

“Lower growth means less room for error,” IMF chief economist Maurice Obstfeld said in a statement. “Persistent slow growth has scarring effects that…reduce potential output and with it, demand and investment.”

The IMF cut Japan’s growth forecast in half to 0.5 percent in 2016 and said Brazil’s economy would now shrink by 3.8 percent this year versus the previous forecast of a 3.5 percent contraction as it struggles through its deepest recession in decades.

Meanwhile, the United States, one of the relative bright spots in the global economy, also saw its 2016 growth forecast cut to 2.4 percent from 2.6 percent. The IMF said it anticipated an increased drag on U.S. exports from a stronger dollar, while low oil prices would keep energy investment weak.

The Fund raised China’s growth forecast slightly to 6.5 percent this year, and 6.2 percent in 2017, partly due to previously announced policy stimulus. But the IMF said it still expects China’s growth to continue to weaken as it transitions to a consumer-driven economy.

“A sharper slowdown in China than currently projected could have strong international spillovers through trade, commodity prices, and confidence, and lead to a more generalized slowdown in the global economy, especially if it further curtailed expectations of future income,” the IMF said in the World Economic Outlook.

The new forecasts follow previous growth markdowns in July, October and January.

Obstfeld said that global growth could easily weaken from the latest IMF forecasts which could reinforce a deflationary spiral of weak growth that erodes future output potential. He said this phenomenon is known in some economic circles as “secular stagnation.”

He also noted that persistently lower growth could reinforce a sense of economic inequality and encourage nationalistic, protectionist policies, particularly in the euro area, which could also reduce potential.