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GAZZE (CIHAN)- The IMF’s latest World Economic Outlook (WEO) Update says that the global recovery has continued but at an uneven pace, and that downside risks remain. Continued policy efforts are needed to secure a more robust recovery.

Global growth decelerated more than expected in the first quarter of 2014, largely because of temporary setbacks, including a sharp correction to an earlier inventory buildup and the effects of a harsh winter on domestic demand in the United States.
“It is a downgrade from 3.7 percent to 3.4 percent for 2014. What is behind that is for the most part what happened in the US in the first quarter it was a large negative growth and that is affecting the numbers for the year,” said Olivier Blanchard, economic counsellor of the IMF.

But growth also disappointed in China as policies were tightened to dampen credit growth and housing market activity. Growth moderated in other emerging markets due to softer external demand and also to slower-than-expected investment growth.

Growth in China is forecast to average 7.4 percent in 2014 as recent measures boost domestic demand. Growth will moderate to 7.1 percent in 2015 as the economy transitions to a more balanced growth path.

The WEO Update projects that global growth will rebound as the temporary constraints recede and recent policy actions to support growth gain ground. For example, in China, limited stimulus measures have been deployed to support demand.

While some have questioned if financial markets have become overly optimistic, Blanchard said the IMF does not yet see reason for alarm.

“So we are watching the financial markets like hawks because we know that when interest rates are low, there is a desire to take more risk to get more return. At this stage we are not very worried. We look around we see pockets, markets with yields a bit low, price a bit high, but it looks like pockets, nothing that should be of major concern from macroeconomic view point,” Blanchard said.

Global growth is projected to rise from 3.2 percent in 2013 to 3.4 percent in 2014 and 4.0 percent in 2015. The forecast is 0.3 percent weaker for 2014 relative to the April 2014 WEO, reflecting actual first-quarter outcomes and a slower domestic demand path in emerging markets. For 2015, the forecast is unchanged from the April WEO, as stronger growth in some aanced economies is expected to offset weaker growth in emerging markets.

Growth in aanced economies is projected to pick up from 1.3 percent in 2013 to 1.8 percent in 2014 and further to 2.4 percent in 2015.

In the United States, a rebound in activity is already underway, but the recovery will provide only a partial offset to the first-quarter outcome. Growth is projected to average 1.7 percent in 2014, rising to 3 percent in 2015.

The outlook for the euro area is broadly unchanged compared to the April WEO, but performance will remain uneven across the region. Continued financial and balance sheet difficulties, and high unemployment will result in weaker growth in some economies.

However, risks from geopolitical tensions have risen as those related to Ukraine are still alive and new risks have emerged from the Middle East.

Financial market volatility could rise with capital flow reversals and widening of risk spreads, set off by falling investor appetite or a sharper-than-expected rise in U.S. long-term rates.

“I think now markets understand more or less, what the plan is, what central banks intend to do, so I do not think we will see major financial chaos or anything like this in the future but that there are going to be bumps,” Blanchard said.

Growth in emerging market and developing economies is expected to decline from 4.7 percent in 2013 to 4.6 percent in 2014 and then accelerate to 5.2 percent in 2015 on stronger exports.

Growth in Brazil is expected to slow in 2014 before recovering in 2015, as investment and consumption continue to be affected by weak confidence and tight financial conditions.

Growth will pick up in 2014–15 in Mexico, but the forecast for 2014 is weaker than that in the April WEO, reflecting the delayed U.S. recovery and softer construction activity.

“For México it’s two factors: the first one is the effect of the United States in the first quarter. It affects Mexico because of the very tight links in trade with the U.S., but it’s a combination of internal factors, domestic demand was a bit weak. In Brazil, the story is more internal demand, weak investment, weak consumption and we think that this weakness in Brazil is going to last not only this year but also next year,” Blanchard said.

Ongoing geopolitical tensions took a sharp toll on domestic demand in the first quarter of 2014 in Russia. Growth has been revised down and is expected to remain subdued over 2014-15.

Policy support is needed to achieve a more robust recovery with stronger actual and potential growth in many economies.
For major aanced economies, the IMF suggests that the supportive monetary policy stance should continue, with normalization proceeding gradually—at different speeds in different economies—as economic slack diminishes.

Fiscal adjustment should maintain a balance between supporting short-term and medium-term growth. Financial regulatory reforms should be completed, and macroprudential tools should be developed and used to limit financial instability risks.

Although priorities differ across emerging market and developing economies, many have limited policy buffers to raise growth if downside risks materialize. These economies should contain external vulnerability, including by allowing the exchange rate to adjust to external financial shocks. Some need to contain fiscal imbalances and inflationary pressures.

Finally, many aanced economies and emerging market and developing economies need to implement structural reforms to lift investment and growth.

SOURCE: CIHAN