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IMF sees rich nations propelling global growth, but risks linger

People pass by a board showing currency exchange rates in Moscow, February 11, 2014. REUTERS/Maxim Shemetov
People pass by a board showing currency exchange rates in Moscow, February 11, 2014. REUTERS/Maxim Shemetov

By Anna Yukhananov

WASHINGTON (Reuters) - The International Monetary Fund on Tuesday predicted the global recovery would strengthen this year and next as output in richer nations picked up, but it warned of rising risks in emerging economies.

In its latest global economic snapshot, the Washington-based IMF nevertheless said better policies were needed in both advanced and emerging nations to avoid a prolonged period of sluggish growth.

Global output should expand 3.6 percent this year, slightly lower than forecast in January, and grow 3.9 percent next year, the IMF said in its flagship "World Economic Outlook." That would make 2015 the strongest year of growth in four years.

But the numbers mask an increasing divergence among countries. While less fiscal austerity should help unshackle growth in the United States and Europe, emerging markets are likely to grow more slowly than thought just a few months ago, the IMF said.

Geopolitical risks have also entered the picture because of the conflict between Russia and Western countries over Ukraine.

"The strengthening of the recovery from the Great Recession in the advanced economies is a welcome development," the IMF said. "But growth is not evenly robust across the globe, and more policy efforts are needed to fully restore confidence, ensure robust growth, and lower downside risks."

Despite weather-related weakness at the start of the year, the IMF said the United States should enjoy above-trend growth of 2.8 percent this year thanks to less severe budget cutting, a recovering housing market and an easy monetary policy.

It said it did not expect the U.S. Federal Reserve to raise interest rates until the third quarter of next year.

Economic activity in the euro zone should pick up slightly as countries slow the pace of fiscal austerity, even though the currency bloc continues to suffer from financial fragmentation and weak credit supply and demand, it said.

The IMF repeated warnings about the very low level of inflation in the euro zone and said it saw about a 20 percent chance of growth-sapping deflation in the region.

"Sustained low inflation would not likely be conducive to a suitable recovery of economic growth," the IMF said, calling again on the European Central Bank to ease monetary policy.

"We hope they will implement (policies) as soon as they're technically ready to do so. Sooner is better than later," IMF chief economist Olivier Blanchard said at a news conference.

Deflation is less of an immediate threat to Japan than it has been in the past, the IMF said, largely because a planned increase in the consumption tax would raise prices.

But it said the tax hike would likely cut into Japan's growth and warned of a one in five chance the world's third-largest economy could slip into recession this year.

UKRAINE IMPACT

The IMF cut forecasts for some of the biggest middle-income countries, including Russia, Turkey, Brazil and South Africa. It forecast that emerging markets overall would grow 4.9 percent this year, 0.2 percentage point lower than in January.

"In emerging market economies, vulnerabilities appear mostly localized," the IMF said. "Nevertheless, a still-greater general slowdown in these economies remains a risk."

Blanchard said as prospects improve in advanced economies, investors will become less forgiving of countries' problems, including large current account deficits or high debt burdens.

"And financial bumps, such as those we saw last summer and earlier this year, may well happen again," Blanchard said, referring to large capital outflows from emerging markets as the U.S. central bank prepared to wind down its massive bond-buying program.

The IMF warned the tug of war between Russia and Western countries over Ukraine could undercut growth in other ex-Soviet economies. Russia, a top producer of commodities and a key natural gas supplier to Europe, was hit with EU and U.S. sanctions over its annexation of Ukraine's Crimea region.

"Greater spillovers to activity ... could emerge if further turmoil leads to a renewed bout of increased risk aversion in global financial markets, or from disruptions to trade and finance due to intensification of sanctions and counter sanctions," the IMF said. It also warned of the potential for disruptions to natural gas and crude oil production.

The report painted a picture of a global economy that could face a period of stagnation without the right policy actions, particularly by officials in the euro zone and Japan.

National elections around the world this year could also complicate countries' abilities to impose difficult economic measures. "Political transitions create very difficult macroeconomic problems and fiscal problems, and there is a very large number of political transitions happening in the world," Blanchard said.

Potential growth is already low in advanced economies and likely has fallen in emerging markets as China rebases its economy from investment toward consumption, the IMF said.

"Fiscal policy needs to play a critical role if growth remains at subpar levels," it said. "In that case, more ambitious measures aimed at raising the growth potential ... should be contemplated."

(Reporting by Anna Yukhananov; Editing by Andrea Ricci)

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