With slow growth increasing the risks to the global economy, the International Monetary Fund in a quarterly update to its World Economic Outlook released Tuesday predicted Japan will experience a contraction next year. But the key monetary agency also lifted its growth forecast for China.
Citing weak exports and slowing investment, the IMF cut its world expansion forecast to 3.2% this year, down from the 3.4% projection made in January. It said a consumption-tax hike would sap growth in Japan, and falling prices continue to hobble commodities producers.
The fund also cut its 2017 growth forecast to 3.5%, down from 3.6% three months ago.
The report said prolonged period of slow growth could expose the global economy to negative shocks with a potential slide into stagnation.
The one bright spot in the Outlook was the IMF upgrading its forecast for China’s growth by 0.2 percentage point for this year and next. It pointed to signs of “resilient domestic demand” and growth in services that offset weakness in Chinese manufacturing.
However, the US and euro area saw their growth forecasts lowered by 0.2 percentage point, with Japan getting the deepest reduction of all the advanced economies. The IMF cut its 2016 expansion estimate for Japan by half to 0.5%. And in 2017, it expects the Japanese economy to contract by 0.1%, vs. a previous forecast for 0.3% growth. The IMF blamed the yen’s recent strength and the scheduled consumption-tax increase for the 2017 slide.
“Growth has been too slow for too long,” IMF chief economist Maurice Obstfeld said. “There is no longer much room for error.”
Among the biggest risks cited was a “return of financial turmoil itself, impairing confidence and demand in a self-confirming negative feedback loop.”