©Reuters Christine Lagarde, the IMF managing director, says the outlook is ‘too low, too brittle and too lopsided’
Low oil prices will not provide a sufficient updraught to dispel the clouds hanging over the global economy, the International Monetary Fund said on Tuesday.
In a sign of its increasing gloom about the medium-term economic outlook, the IMF cut its global economic growth forecasts by 0.3 percentage points for both 2015 and 2016 despite believing cheaper oil represents a "shot in the arm".
Its 2015 forecast for the UK was unchanged at 2.7 per cent and cut by 0.1 percentage point for next year to 2.4 per cent compared with its previous forecast in its World Economic Outlook last October.
Its outlook for the UK is broadly favourable despite uncertainty about the general election, with the faltering eurozone economy likely to prove the biggest brake on growth.
Last year the IMF described Chancellor George Osborne's austerity programme as "appropriate" but cautioned in October that house prices were rising uncomfortably quickly and that unemployment would fall more slowly this year than it did last year.
Since then both house price growth and the rate at which unemployment is falling have slowed.
Mr Osborne said in a statement: "There are risks out there in the global economy and it's a timely reminder that we've got to go on working through our long-term economic plan if we want to stay ahead."
The 0.2 and 0.3 percentage point cuts to the eurozone forecast for this year and next are relatively minor but are based on the European Central Bank introducing quantitative easing this week.
The cut to the forecast will, however, heighten the concern expressed by the IMF in October that there was a 40 per cent chance of the single currency area slipping into its third recession since 2008.
This, however, compares favourably with much of the rest of the world. The IMF cut its global growth forecast from 3.8 per cent to 3.5 per cent for this year and from 4.0 per cent to 3.7 per cent for 2015. These rates are still close to the average rate for the past 30 years but it had hoped for a period of much faster growth to recoup some of the output lost in the financial and economic crisis of 2008-9.
The downgrades have been driven mostly by slowdowns in emerging markets and developing economies, which the fund expects to grow by 4.3 per cent this year and 4.7 per cent next year.
The fund downgraded its growth forecast for China by 0.5 percentage points next year which, if realised, would leave its economy growing more slowly than India's. The fund thinks the country's economy will expand 6.8 per cent in 2015 and 6.3 per cent in 2016. Official Chinese growth figures released on Tuesday reported growth of 7.4 per cent in 2014.
Christine Lagarde, IMF managing director, described the global growth outlook as "too low, too brittle and too lopsided" last week as the fund was putting the final touches to its forecasts.
In December the IMF expected lower oil prices to boost underlying global growth rates by 0.3-0.8 percentage points. The cut in the overall forecasts highlights the extent to which it has become more pessimistic.
©Reuters George Osborne: staying the course on austerity
The weaker outlook in most countries stems from "investment weakness as adjustment to diminished expectations about medium-term growth continues in many advanced and emerging market economies", it says.
Having incorporated the 55 per cent decline in oil prices since September, a rise in the value of the dollar and these weaker medium-term prospects, the IMF believes the world economy will grow 3.5 per cent in 2015 and 3.7 per cent in 2016.
As well as China, there were big downgrades to the growth forecasts for Russia, Brazil, the Middle East and Africa.
Russia is set for a deep recession, with a contraction of 3 per cent forecast this year and 1 per cent next, according to the fund. More than 1 percentage point has been sliced from Brazil's forecast growth rate this year, with Latin America's largest economy likely to expand only 0.3 per cent in 2015 and 1.5 per cent next year, the IMF believes.
The US and Spain enjoyed the largest uplift to their forecasts, with the US, the world's most important economy, expected to expand 3.6 per cent in 2015 and 3.3 per cent in 2016.
Forecasts for other large economies such as India, along with the eastern Europe region, were left largely unaltered.
To improve the outlook, the IMF continued to recommend loose monetary policy and increased infrastructure investment, which it believes helps increase medium-term growth and the more immediate recovery.
The fund's gloomy assessment chimed with an International Labour Organisation prediction, also published on Tuesday, that global unemployment will remain elevated until at least 2017 as the slight fall in joblessness in advanced economies is offset by an increase in developing countries — a reversal of the trend in recent years.
In its World Employment and Social Outlook, the ILO said: "The challenge of bringing unemployment and underemployment back to pre-crisis levels now appears as daunting a task as ever, with considerable societal and economic risks associated with this situation."
The ILO forecast that unemployment in the Group of 20 advanced economies would fall from 7.7 per cent to 7 per cent, propelled by improvements in the US, UK and some southern European countries. But joblessness in the G20's emerging economies would increase from 5 per cent to 5.2 per cent, driven by increases in east Asia and Brazil, it said.
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