In new forecasts, the IMF downgraded its outlook for more than a dozen of the world's largest economies, including markedly slower growth in China. The fund said global growth would be 0.3 percentage point lower this year and next than it had previously expected. It now expects the world economy to expand 3.5% this year and 3.7% in 2016.
"The price of oil is a shot in the arm," IMF Chief Economist Olivier Blanchard said in an interview. "But there is clearly a state of weakness in the world economy and this shot is not enough."
The emergency lender raised its outlook for the U.S. economy this year by half a percentage point to 3.6% as falling fuel prices at the pump helped juice the American recovery.
But tumbling crude costs failed to fend off stubborn economic anemia in the eurozone and Japan, two of the world's largest economies at risk of returning into recession. The IMF cut its 2015 growth expectations for the currency union by 0.2 percentage point to 1.2% and chipped off the same amount for Japan's forecast, putting growth in the world's No. 3 economy at 0.6% for the year.
The IMF also chopped 0.3 percentage point off China's forecast despite cheaper energy costs as Beijing sacrifices output to build up buffers against financial turmoil in its real-estate market. The fund's forecast for China's 2015 growth rate of 6.8% would be the slowest year-over-year expansion since 1990 and is below the 7% growth target that many economists expect Beijing to set for this year. Next year, growth in China is expected to decline a half-percentage point to 6.3%.
China's housing-market problems are more serious than the fund originally expected. Mr. Blanchard said any benefits China might have accrued from less-expensive oil will be offset as the government toughens its regulation of the nonbank financial sector and cuts public investment.
The fund shaved more than a half-percentage point off its forecast for emerging market economies, noting a 3% contraction in Russia's economy as oil prices and Western sanctions bite into the crude exporter, and slower expected output in Brazil, South Africa and other major industrializing countries.
IMF Managing Director Christine Lagarde last week said the global economic vulnerabilities underscore the increasing urgency of officials around the world to take more aggressive action to spur growth.
The IMF has long been a vocal advocate for the European Central Bank to use its balance sheet to leverage growth in Europe. It has urged Germany to use government cash to help stimulate the eurozone and for the weaker member states to overhaul their economies.
Mr. Blanchard said the euro's depreciation in recent weeks indicate investors have already factored in an announcement for new easy-money policies by the European Central Bank on Thursday.
"Will it work? I think it has largely worked," the IMF chief economist said. "The question is if they don't do it, then it would be an issue."
The ECB's potential action comes as markets expect the U.S. Federal Reserve to raise rates in the middle of the year amid signs that the U.S. economy is gaining steam.
Mr. Blanchard warned of possible turmoil in global markets as a monetary-policy divide grows between the U.S. potentially raising rates while the ECB and Japan move in the opposite direction as they try to stimulate growth with easy-money policies.
But, he said, markets have had so much time to digest the expected Fed rate increase that, while it is likely to fuel gyrations in currency, bond and stock markets, it is unlikely to cause major harm to the global economy.
"There are going to be some relative price and exchange-rate adjustments, and they can create turmoil," he said. "Can it develop into something that can have a macro effect? My gut feeling is probably not."
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(END) Dow Jones Newswires
January 19, 2015 22:20 ET (03:20 GMT)
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