IMF growth outlook cut over ‘frothy’ stock risks

The International Monetary Fund (IMF) has cut its outlook for global growth in 2015 and warned about the risks of rising geopolitical tensions and a financial-market correction, as stocks reach "frothy" levels.

The world economy will grow 3.8% next year, compared with a July forecast for 4%, after a 3.3% expansion this year, the Washington-based IMF said.

US growth is helping lead a worldwide acceleration that’s weaker than the fund predicted two and a half months ago as the outlooks for the euro area, Brazil, Russia and Japan deteriorate.

The IMF said in its latest World Economic Outlook: “Emerging markets are adjusting to rates of economic growth lower than those reached in the pre-crisis boom and the post-crisis recovery.”

The outlook buttressed the case made by IMF managing director Christine Lagarde, who warned last week that officials needed to act to prevent a prolonged period of sluggish growth, a trend she called the “New Mediocre”.

According to the report, a sustained period of policy interest rates near zero in advanced economies had raised the risk that some financial markets may be overheating. The Standard & Poor’s 500 Index rose to a record on September 18.

“Downside risks related to an equity price correction in 2014 have also risen, consistent with the notion that some valuations could be frothy,” the lender said without naming specific markets.

The US is a bright spot, according to the IMF. The world’s largest economy is predicted to grow 2.2% this year, compared with a 1.7% projection in July. Next year, the US is seen expanding 3.1%, compared with a 3% forecast in July.

The IMF said it expected the Federal Reserve to start raising interest rates in the middle of next year, a projection that’s in line with the median estimate of economists surveyed by Bloomberg.

The euro area will grow 1.3% next year, slower than the 1.5% pace predicted in July, after a 0.8% gain this year, according to the IMF.

If inflation doesn’t improve in the currency bloc, the ECB may need to do more to stave off deflation, including the purchase of sovereign bonds, according to the fund.

Japan, where consumer spending has been curbed by a sales-tax increase, also had its outlook cut. The IMF said Japan’s economy would expand 0.8% next year, compared with a 1.1% advance predicted in July.

Among emerging markets, Brazil suffered the biggest cut to its growth outlook. The country’s economy is expected to grow 0.3% in 2014, down from the IMF forecast of 1.3% in July.

China is forecast to expand 7.4% this year and 7.1% next year, little changed from the fund’s forecasts in July.

The IMF said it was expecting a recession in Ukraine and stagnation in Russia in 2014, with the effects waning in 2015 and beyond. The effect could be broader if natural-gas and crude-oil markets are disrupted, according the fund.

In the Middle East, the IMF anticipates severe oil related effects of military strife in Iraq and Libya.

- Bloomberg


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