World economic outlook expects global growth to be 3.3% in 2014, down from its April forecasts as countries fail to recover strongly from recession

The International Monetary Fund (IMF) has cut its global growth forecasts for 2014 and 2015 and warned that the world economy may never return to the pace of expansion seen before the financial crisis.

In its flagship half-yearly world economic outlook (WEO), the IMF said the failure of countries to recover strongly from the worst recession of the postwar era meant there was a risk of stagnation or persistently weak activity.

The IMF said it expected global growth to be 3.3% in 2014, 0.4 points lower than it was predicting in the April WEO and 0.1 points down on interim forecasts made in July. A pick-up in the rate of expansion to 3.8% is forecast for 2015, down from 3.9% in the April WEO and 4% in July. But the IMF highlighted the risk that its predictions would once again be too optimistic.

“The pace of global recovery has disappointed in recent years”, the IMF said, noting that since 2010 it had been consistently forced to revise down its forecasts. “With weaker-than-expected global growth for the first half of 2014 and increased downside risks, the projected pickup in growth may again fail to materialise or fall short of expectation.”

The IMF’s economic counsellor, Olivier Blanchard, said the three main short-term risks were that financial markets were too complacent about the future; tensions between Russia and Ukraine and in the Middle East; and that a triple-dip recession in the eurozone could lead to deflation.

Although the IMF believes the US Federal Reserve and the Bank of England will be the first two major central banks to start raising interest rates by the middle of 2015, it advised that official borrowing costs should be kept low so long as demand remained weak. It added that countries with healthy public finances, such as Germany, should spend more on infrastructure in order to boost growth and cautioned against over-aggressive attempts to reduce budget deficits.

From a medium-term perspective, low potential output growth and “secular stagnation” are still important risks, given that robust demand growth has not yet emerged. “In particular, despite continued very low interest rates and increased risk appetite in financial markets, a pick-up in investment has not yet materialised, possibly reflecting concerns about low medium-term potential growth rates and subdued private consumption (in a context of weak growth in median incomes).”

Japan and the euro area were most at risk of stagnation, the WEO said. “In such a situation, some affected countries would not be able to generate the demand needed to restore full employment through regular self-correcting forces.”

The IMF said the outlook was brighter in the US and the UK, which were “leaving the crisis behind and achieving decent growth”. Britain is forecast to see its gross domestic product increase by 3.2% in 2014 – up 0.3 points from the April WEO and the fastest of any G7 nation.

America’s slow start to 2014 means, according to the IMF, that it will expand by 2.2% this year, rising to 3.1% in 2015 – faster than Britain’s 2.7%.

Blanchard said, however, that even in the two biggest Anglo-Saxon economies potential growth rates were lower than in the early 2000s.

Euro area growth is predicted to be 0.8% in 2014, rising to 1.3% next year. Japan’s high level of public debt and ageing population mean it will grow by less than 1% in both years, the IMF said.

Blanchard said there was a possibility that ultra-low growth in the euro area could turn into deflation, a period of falling prices that would make debts more expensive to service.

“This is not our baseline (forecast), because we believe euro area fundamentals are slowing improving. But should such a scenario play out, it would be the major issue confronting the global economy.”

The IMF said the slowdown in growth was affecting not just the west but also emerging markets such as China, Russia and Brazil.