The International Monetary Fund today predicted the global recovery would strengthen this year as output in richer nations picked up, but it warned of rising risks in emerging economies.

In its latest global economic snapshot, the Washington-based IMF said better policies were needed to raise the world’s productive capacity and avoid a prolonged period of sluggish growth.

Global output should expand 3.6 per cent this year, slightly lower than forecast in January, and grow 3.9 per cent next year, the IMF said in its twice-yearly “World Economic Outlook.”

But the number masks an increasing divergence among countries. While less fiscal austerity should help unshackle growth in the United States and Europe, emerging markets are likely to grow more slowly than thought just a few months ago due to tighter financial conditions, the IMF said.

Geopolitical risks have also entered the picture because of the conflict between Russia and Western countries over Ukraine.

“The strengthening of the recovery from the Great Recession in the advanced economies is a welcome development,” the IMF said. “But growth is not evenly robust across the globe, and more policy efforts are needed to fully restore confidence, ensure robust growth, and lower downside risks.”

Despite weather-related weakness at the start of the year, the IMF said the United States should enjoy above-trend growth of 2.8 per cent this year thanks to less severe budget cutting, a recovering housing market and an easy monetary policy.

It said it did not expect the US Federal Reserve to raise interest rates until the third quarter of next year. Economic activity in the euro zone should pick up slightly as countries slow the pace of fiscal austerity, even though the currency bloc continues to suffer from financial fragmentation and weak credit supply and demand, it said.

The IMF repeated warnings about the very low level of inflation in the euro zone and said it saw about a 20 per cent chance of growth-sapping deflation in the region.

"Sustained low inflation would not likely be conducive to a suitable recovery of economic growth," the IMF said, calling again on the European Central Bank to ease monetary policy.

Deflation is less of an immediate threat to Japan than it has been in the past, the IMF said, largely because a planned increase in the consumption tax will help support prices because the tax will have the effect of raising prices.

But it said the tax hike would likely cut into Japan’s growth and warned of a one in five chance the world’s third-largest economy could slip into recession this year.

The IMF cut forecasts for some of the biggest middle-income countries, including Russia, Turkey, Brazil and South Africa. It forecast that emerging markets overall would grow 4.9 per cent this year, 0.2 percentage point lower than in January.

“In emerging market economies, vulnerabilities appear mostly localized,” the

IMF said. “Nevertheless, a still-greater general slowdown in these economies remains a risk.”

The IMF warned the tug of war between Russia and Western countries over Ukraine could undercut growth in other ex-Soviet economies. Russia, a top producer of both commodities and a key natural gas supplier to Europe, was hit with EU and US sanctions over its annexation of Ukraine’s Crimea region. “Greater spillovers to activity ... could emerge if further turmoil leads to a renewed bout of increased risk aversion in global financial markets, or from disruptions to trade and finance due to intensification of sanctions and countersanctions,” the IMF said, also warning of the potential for disruptions to natural gas and crude oil production.

The report painted a picture of a global economy that could face a period of stagnation without the right policy actions, particularly in the euro zone and Japan.

Potential growth is already low in advanced economies and likely has fallen in emerging markets as China rebases its economy from investment toward consumption, the IMF said. "Fiscal policy needs to play a critical role if growth remains at subpar levels," it said. "In that case, more ambitious measures aimed at raising the growth potential ... should be contemplated."

Reuters