Warning of 'great challenges' this year, IMF cuts world economic growth forecast

Warning of "great challenges" this year for the world economy, the International Monetary Fund on Tuesday downgraded its forecast for global growth.

The economy worldwide would expand 3.4% this year and 3.6% next year, the organization said. Both figures would be improvements over 2015's 3.1% growth.

But the forecasts in the IMF's quarterly world economic outlook were down from October projections of 3.6% growth this year and 3.8% next year.

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"This coming year is going to be a year of great challenges, and policymakers should be thinking about short-term resilience and the ways they can bolster it, but also about the longer-term growth prospects," said Maurice Obstfeld, the IMF's economic counselor.

The U.S. economy is projected to grow by 2.6% this year and next year, down from October projections of 2.8%. Growth last year was 2.5%, the IMF estimated.

Slowdowns in many advanced and emerging economies led to the downgraded global forecast.

Underscoring the IMF's concerns, China reported Tuesday that its economy expanded 6.9% last year. That was down from 7.3% in 2014 and the slowest pace since 1990.

The figure from China's National Bureau of Statistics was in line with estimates and the government's target of about 7% growth.

Although there is skepticism about the reliability of China's official economic data, the report boosted financial markets because there was a fear the government's number would be lower given the signs in recent months of a steeper slowdown.

The Dow Jones industrial average was up about 85 points, or 0.5%, in early trading Tuesday. The Standard & Poor's 500 and Nasdaq indexes also were up about 0.5%.

"The long-term reasons for China’s weaker growth have not substantially changed — a slow grind of old industries and excess investment," said Brian Jackson, a China economist at IHS Global Insight.

IHS forecasts China's economy will expand 6.3% this year as the nation continues to transition from a focus on manufacturing and exports to more domestic consumption, he said.

The IMF also projects 6.3% economic growth in China this year, dropping to 6% next year. Those figures are the same as in the October forecast.

But the IMF warned that a sharper-than-expected slowdown in China was one of the main risks to the world economy.

Such a slowdown "could bring more international spillovers through trade, commodity prices and waning confidence," the IMF said.

A key reason for the IMF's downgrade in projections for developing economies is a deep recession in Brazil, triggered in part by less demand for its commodities in China.

The IMF said Brazil's economy would contract 3.5% this year — much worse than forecast in October — after a 3.8% contraction last year.

jim.puzzanghera@latimes.com

Follow @JimPuzzanghera on Twitter

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