WASHINGTON—Rising protectionism, record debt levels and a continuing economic malaise in wealthy countries will drag on global growth next year despite a turnaround in several key emerging markets, the International Monetary Fund said Tuesday.
Global growth should only marginally pick up in 2017 to 3.4% from 3.1% this year, the fund said in its latest World Economic Outlook, despite policy makers pushing central bank stimulus into uncharted territories.
Downgrades in the forecast for the U.S. and the U.K. offset upgrades for Japan, Germany, India and Russia, keeping the IMF's central projections for the global economy unchanged from its last forecast in July.
A political backlash against the perceived negative effects of globalization threatens to undermine an already-weak and precarious recovery, the IMF warned.
"Subpar growth at recent levels risks feeding on itself through the negative economic and political forces it is unleashing," IMF chief economist Maurice Obstfeld said, referring in large part to the surge in trade barriers around the world and the rise in opposition to free trade and immigration in the politics of the U.S. and Europe.
Fearful of a trend toward protectionism when the global economy is already struggling with deflation risks, the IMF highlighted the potential shocks to growth from a sudden increase in tariffs and other trade barriers.
The report sets the stage for a gathering of the world's finance ministers and central bankers at the semiannual IMF/World Bank meetings in Washington, where officials will urge each other to fine-tune their economic policies to revive feeble growth prospects.
The fund shaved 0.2 percentage point from the U.K.'s forecast for next year as the June referendum to pull the country out of the European Union weighs on the country's output. It is unclear what the full impact will be as the country starts two-year negotiations in March to determine its future relationship with the bloc. But the increase in economic and political uncertainty is expected to cut into investment and consumer spending, and trade and financial flows should thin, the IMF said. It sees U.K. growth falling to 1.1%, down from 1.8% this year.
As for the U.S., weakness overseas and lackluster investment quelled an expected uptick in growth for its economy. Combined with the commodity-price hit to the energy sector and the uncertainty caused by the polarized presidential election campaign, the IMF nipped the U.S. forecasts down 0.6 percentage point for this year to 1.6% and 0.3 percentage point for 2017 to 2.2%.
The risk of deflation continues to plague many of the other major industrialized nations, despite an unprecedented era of low and negative interest rates. Japan's newly aggressive central bank policy and a delayed tax increase pushed up the fund's forecast by half a percentage point, but only to 0.6% next year. In the eurozone, growth is expect to fall to 1.5%, down 0.2 percentage point. Businesses in the currency union are tentative to invest and banks reluctant to lend, debt levels still weigh on government and bank balance sheets, and productivity growth is negligible.
"Tepid growth risks becoming self-perpetuating as investment falls, productivity growth declines, labor markets become less dynamic, and human capital erodes," Mr. Obstfeld warned.
Emerging markets aren't going to be able to pull the global economy out of its long-term funk, despite contributing an expanding share of the global economy.
Russia and Brazil are barely poised to return to positive territory as stabilizing commodity prices firm prospects after two years of deep recession. The IMF cut the outlook for Turkey's economy after the failed coup attempt in July. The forecast for South Africa, whose debt is on the verge of being declared "junk" by rating firms, was also downgraded as the country wrestles with falling demand from China, weak commodity prices and political turmoil.
And although China's growth is expected to slow from 6.6% this year to a still-hot 6.2% in 2017, that modest decrease is primed by credit injections into an economy with too much industrial capacity and dangerously high debt levels. Such near-term growth, especially without overhauls to the economy that make it more market-determined and consumer-led, comes at the risk of lower long-term output, the IMF and others warn.
India remains one of the few bright spots in the global economy, running at 7.6% this year and next.
Still, both India and China face a problem that many emerging markets may only just beginning to grapple with: rising corporate debt levels.
High corporate debt, declining profitability and weak bank balance sheets—especially in commodity exporters—"leave these economies still exposed to sudden shifts in investor confidence," the IMF said.
Combined with the problems that advanced economies are contending with, the IMF said there was a rising prospect for an extended shortfall in private demand leading to permanently lower output and low inflation.
Such a prolonged period of low growth would add to debt problems many countries are facing, making winding down that borrowing overhang difficult. That would further weigh on growth.
Against those broad set of threats, the IMF has called for more urgent action by authorities, saying the current policies fall short of reviving growth and are excessively reliant on central bank stimulus.
"Markets fear that policy has no room to counter the next big negative economic shock," Mr. Obstfeld warned.
However, despite high debt levels and the failure of central banks to goose inflation with record-low rates, the IMF says officials in the world's largest economies have policy space to boost growth if a shock hits the global economy. But that would require doing what they've failed to accomplish in the past few years: Using all available tools—fiscal, structural and monetary—in a comprehensive, consistent and coordinated fashion.
The IMF also took pains to caution policy makers against the temptation to revert to protectionism as trade growth stalls in the low-growth era. Such anti-trade trends risk tilting the world economy deeper into a long-term funk.
The fund estimated that a surge in trade barriers around the globe that pushed up import prices by 10% could sap nearly 2 percentage points off world growth over five years, force a 15% decline in exports and pull investment down by more than 4%.
Write to Ian Talley at ian.talley@wsj.com
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