Christine Lagarde, managing director of International Monetary Fund (IMF), speaks at Georgetown University in Washington, D.C., on Oct. 2, 2014.Andrew Harrer/Bloomberg
The International Monetary Fund cut its outlook for global economic growth, an acknowledgement that there are limits to the United States' ability to power the world economy on its own.
The U.S.'s gross domestic product will expand 2.2 per cent in 2014, the IMF said in a revised outlook, a remarkable achievement given U.S. GDP contracted in the first quarter. The forecast is a half percentage point higher than it was when the fund last updated its estimates in July, making a memory of the harsh winter that momentarily killed the U.S.'s economic momentum.
But the global economy no longer is a single-engine plane and the other motors are troubled. Economic growth in China remains strong, but it's slowing, and the IMF is worried the real estate market could crash. The bigger problems are in Europe and Japan, where demand is so weak that deflation remains a serious threat in both places.
The result: too little momentum to outweigh an array of uncertainties, including Ukraine's conflict with Russia and the international fight against the terror group Islamic State in Syria and Iraq. Investment is weak despite buoyant financial markets, suggesting executives remain unconvinced by the prospect for profit amid geopolitical tension and scattered demand. The fund dropped its outlook for world economic growth in 2014 to 3.3 per cent from 3.4 per cent, and reduced its estimate for 2015 to 3.8 per cent.
"An uneven global recovery continues," the IMF said in its latest World Economic Outlook, released Tuesday ahead of the 188-member fund's annual meeting this weekend in Washington.
Canada is among a group of advanced economies along with Britain, Norway and some others that the IMF characterized as "solid." The IMF raised its outlook for Canada's GDP growth this year to 2.3 per cent and in 2015 to 2.4 per cent, from 2.2 per cent and 2.3 per cent, respectively.
The fund said Canada should benefit from the relative strength of the U.S. economy, which, combined with a weaker exchange rate, promise increased exports. Mexico's economy also should stabilize and strengthen thanks to demand from its main partner in the North America Free Trade Agreement, the IMF said.
But the U.S. economy remains a lesser version of what it was before the Great Recession. The country's GDP routinely advanced at rates of around 3 per cent before the financial crisis. An aging population is robbing the country of skilled workers and salaried consumers, and U.S. productivity has slipped in recent years. The U.S. economy now can grow little faster than 2 per cent per year without stoking inflation. The IMF reduced its expectations for global trade and cut its outlook for oil prices.
"The pace of the global recovery has disappointed in recent years," the IMF said. "This further underscores that in most economies, raising actual and potential growth must remain a priority."
India, which is benefiting from a revival in business confidence after the election of Prime Minister Narendra Modi earlier this year, was the only other country besides the U.S. to get a notable upward revision to its economic outlook. The IMF slashed its outlook for Brazil this year by one percentage point and now says Latin America's biggest economy will struggle to avoid a recession. Italy and Russia face similar struggles. The IMF called on Germany's government to loosen its purse strings and use fiscal stimulus measures to spark Europe's stagnant economy.
The human cost notwithstanding, the prospect of a protracted conflict in the Middle East troubles the IMF because oil prices could rise. The fund also sees a threat in elevated equity prices and low volatility in financial markets, which could be out-of-step with an economic reality of subdued growth, regional violence and an outbreak of Ebola in several countries in Africa. "Downside risks from a financial market correction have increased," the IMF said.
Canada is vulnerable. The IMF said the country's economy would be hurt if global trade remains subdued. Elevated household debt and "a still-overvalued housing market" are "important domestic vulnerabilities." The fund said the Bank of Canada should keep interest rates low and that authorities should keep a close eye on the housing market.