In the U.S., “the pickup in 2014 will be carried by final domestic demand, supported in part by a reduction in the fiscal drag as a result of the recent budget agreement. But the latter also implies a tighter projected fiscal stance in 2015,” the IMF said in the report. “The euro area is turning the corner from recession to recovery,” it said, adding that the improvement is likely to be more modest in economies still under stress.
On a conference call, Blanchard said the policy framework and timing implemented by the Fed is “reasonable” and said he doesn’t think the Fed is “biased in the direction of exiting too early.” He pointed to a low-probability scenario of risks from low interest rates building faster than expected.
Blanchard also said the IMF sees a 10% to 20% probability of deflation in Europe tied to a slow economy, and urged the European Central Bank to commit to sustaining demand and maintaining inflation.
The fund predicted euro-area growth of 1% this year, little changed from its forecast in October, and 1.4% next year.
While U.K. growth has been boosted by easier credit and better sentiment, “economic slack will remain high,” the IMF said. “In Japan, growth is now expected to slow more gradually compared with October 2013 WEO projections. Temporary fiscal stimulus should partly offset the drag from the consumption tax increase in early 2014,” the IMF said.
In China, the leadership is trying to reduce the economy’s reliance on debt and mitigate risks of a financial crisis that could hinder the changes the ruling Communist Party pledged in November to implement. Data last week from the People’s Bank of China showed a record drop in second-half credit, following money-market cash crunches in June and December that underscored the difficulty of bringing credit under control.
“Growth in China rebounded strongly in the second half of 2013, due largely to an acceleration in investment,” the IMF said. “More progress is required on rebalancing domestic demand from investment to consumption to effectively contain the risks to growth and financial stability from overinvestment.”
In other emerging markets, domestic demand has remained weaker as tighter financial conditions since mid-2013 -- when speculation mounted that the Fed was preparing to taper -- as well as policy or political uncertainty and bottlenecks damp investment, the IMF said. Brazil is projected to grow 2.3% this year, compared with 2.5% in October, and Russia’s outlook was cut by 1 percentage point to 2%.