Global economy grows in low gear, entering another transition

The International Monetary Fund (IMF) on Tuesday lowered its forecast for global economic growth, saying the world economy has entered another transition with a set of challenges that call for new reform efforts.

The Washington-based global lender cut its growth forecast for the world economy to 2.9 percent this year, 0.3 percentage point lower than its July projection, due to a slowdown of growth in key emerging market economies. It also revised down its forecast for the world economic growth for next year to 3.6 percent, 0.2 percentage point lower than its July estimate.

"Global growth is in low gear, the drivers of activity are changing, and downside risks persist," the IMF said in its latest World Economic Outlook (WEO) report.

"The world economy has entered yet another transition. Advanced economies are gradually strengthening. At the same time, growth in emerging market economies has slowed. This confluence is leading to tensions, with emerging market economies facing the dual challenges of slowing growth and tighter global financial conditions," IMF chief economist Olivier Blanchard said in the foreword to the report.

"China and a growing number of emerging market economies are coming off cyclical peaks. Their growth rates are projected to remain much above those of the advanced economies but below the elevated levels seen in recent years, for both cyclical and structural reasons," noted the flagship report of the IMF. "Growth in China is slowing, which will affect many other economies, notably the commodity exporters among the emerging market and developing economies."

The Chinese economy was expected to ease pace to grow 7.6 percent in 2013 and 7.3 percent in 2014, respectively, said the IMF report.

"At the same time, old problems -- a fragmented financial system in the euro area and worrisomely high public debt in all major advanced economies -- remain unresolved and could trigger new crises," noted the report.

The euro zone will remain in recession in the remaining weeks of the year, with economic activity contracting by 0.4 percent. Growth will rise to 1.0 percent in 2014, predicted the IMF.

"U.S. monetary policy is reaching a turning point, and this has led to an unexpectedly large increase in long-term yields in the United States and many other economies," said IMF in the report.

"This change could pose risks for emerging market economies, where activity is slowing and asset quality weakening. Careful policy implementation and clear communication on the part of the Federal Reserve will be essential," according to the report.

U.S. Federal Reserve Chairman Ben Bernanke's hint in May that the central bank may start scaling back its massive asset purchase program later this year on the back of a recovering economy has rattled global financial markets in recent months, sending a ripple effect to emerging economies.

The IMF forecast that the U.S. economy would expand 1.6 percent in 2013 before firming to a 2.6-percent growth next year.

"The U.S. economy remains at the center of events. Private demand continues to be strong, although growth has been hobbled this year by excessive fiscal consolidation. Politics is creating uncertainty about both the nature and the strength of the fiscal adjustment," contended Blanchard.

"Conflicts around increasing the debt ceiling could lead to another bout of destabilizing uncertainty and lower growth," warned Blanchard.

With the ongoing government shutdown starting on Oct. 1, Washington faces another fiscal deadline as U.S. Treasury Secretary Jacob Lew has told Congress that the federal government will reach its debt ceiling of 16.7 trillion U.S. dollars by Oct. 17, and failure to raise it by U.S. Congress would lead to a catastrophic default.

"The major economies must urgently adopt policies that improve their prospects; otherwise the global economy may well settle into a subdued medium-term growth trajectory," suggested the IMF.

"The United States and Japan must develop and implement strong plans with concrete measures for medium-term fiscal adjustment and entitlement reform, and the euro area must develop a stronger currency union and clean up its financial systems. China should provide a permanent boost to private consumption spending to rebalance the growth of demand away from exports and investment. Many emerging market economies need a new round of structural reforms," said the report.