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IMF Cuts Global Growth Forecast Citing Slowdown in China Trade

The International Monetary Fund cut its global growth forecasts for the third time in less than a year on Tuesday, citing a sharp slowdown in China trade and weak commodity prices that are hammering Brazil and other emerging markets.

The Fund forecast that the world economy would grow at 3.4 percent in 2016 and 3.6 percent in 2017, both years down 0.2 percentage point from the previous estimates made last October. It said that policy makers should be considering ways to bolster short-term demand.

The updated World Economic Outlook forecasts came as global financial markets have been roiled by worries over China's slowdown and plummeting oil prices.

"China could encounter rough patches where growth slows more than expected directly affecting trade partners while disturbing foreign exchange and other asset markets world wide," said IMF economic counselor Maurice Obstfeld.

The IMF maintained its previous China growth forecasts of 6.3 percent in 2016 and 6.0 percent in 2017, which nonetheless represent sharp slowdowns from 6.9 percent in 2015 and 7.3 percent in 2014.

But the Fund said a steeper slowing of demand in China remained a risk to global growth and that weaker-than-expected Chinese imports and exports were weighing heavily on other emerging markets and commodity exporters.

Continued market upheaval also could help drag growth lower if it leads to major risk aversion and currency deprecations in emerging markets, the IMF said in the report. It said other risks included further dollar appreciation and an escalation of geopolitical tensions.

"These oil price movements certainly impose stresses on oil exporters especially in countries where the government and budget depends on oil revenues but there is a silver lining in terms of affects on consumers worldwide, so they are not an unmitigated negative," added Obstfeld.

The Fund said the outlook for an acceleration of U.S. output was dimming as dollar strength weighs on manufacturing and lower oil prices curtail energy investment. It now projects U.S. economic growth at 2.6 percent for both 2016 and 2017, down 0.2 percentage point in both years from the October forecast.

"The Fed responded based on their best forecast that the U.S. was growing strongly and it is relative to pretty much all other industrial countries that inflation was rising to their target level at a sufficient pace and we wouldn't presume to second guess their diagnosis at the time.It is certainly true however that if we look at incoming data the U.S. economy might appear to be marginally weaker and inflation expectations longer term, marginally weaker as well," said Obstfeld.

In Europe, lower oil prices will help support private consumption, so the IMF said it added 0.1 percentage point to its 2016 euro area growth forecast, bringing it to 1.7 percent, where it will remain for 2017.

Brazil will stay mired in recession in 2016, with output contracting 3.5 percent, a 2.5 percentage-point downward shiftfrom the previous forecast, and there will be essentially no growth in 2017 as Latin America's largest economy struggles with lower Chinese demand.

"In Brazil the political configuration has obviously not improved, in fact it has gotten worse with the beginning of impeachment proceedings and the growing reach of corruption allegations, this has undermined confidence as has the continuing deterioration of the budgetary outlook there which is snapping confidence," he added.

Obstfeld said the Fund was encouraging monetary policy to remain expansive in some countries, such as Japan and in Europe. (Reuters)