India remains a bright spot as global recovery slows: IMF

Global economic growth continues, but at a sluggish pace that leaves the world economy more exposed to risks, says the International Monetary Fund's (IMF) latest World Economic Outlook (WEO).

The WEO forecasts global economy to grow at 3.2 per cent in 2016, picking up to 3.5 per cent in 2017, a downward revision of 0.2 per cent and 0.1 per cent, respectively, compared with the January 2016 update.

On the positive side, the report said India remains a bright spot - with strong growth and rising real incomes. The Asean-5 economies - Indonesia, Malaysia, Philippines, Thailand, and Vietnam - are also performing well. And Mexico, Central America, and the Caribbean are beneficiaries of the US recovery and, in most cases, lower oil prices.

However, WEO said, in the current environment of weak growth, risks to the outlook are now more pronounced.

Recovery remains too slow, too fragile, with the risk that persistent low growth can have damaging effects on the social and political fabric of many countries, IMF managing director Christine Lagarde had warned in a recent speech.

 ''Lower growth means less room for error,'' said Maurice Obstfeld, IMF economic counsellor and director of research. ''Persistent slow growth has scarring effects that themselves reduce potential output and with it, demand and investment,'' he added.

The current diminished outlook calls for an immediate, proactive response, Obstfeld noted. To support global growth, he emphasised, there is a need for a more potent policy mix - a three-pronged policy approach based on structural, fiscal, and monetary policies.

''If national policymakers were to clearly recognise the risks they jointly face and act together to prepare for them, the positive effects on global confidence could be substantial,'' Obstfeld added.

Growth in advanced economies is projected to remain modest at about 2 per cent, according to the WEO. The recovery is hampered by weak demand, partly held down by unresolved crisis legacies, as well as unfavorable demographics and low productivity growth.

In the United States, growth this year is expected to be flat at 2.4 per cent, with a modest uptick in 2017. Domestic demand will be supported by improving government finances and a stronger housing market that help offset the drag on net exports coming from a strong dollar and weaker manufacturing.

In the euro area, low investment, high unemployment, and weak balance sheets weigh on growth, which will remain modest at 1.5 per cent this year and 1.6 per cent next year.

In Japan, both growth and inflation are weaker than expected, reflecting in particular a sharp fall in private consumption. Growth is projected to remain at 0.5 per cent in 2016 before turning slightly negative to -0.1 per cent in 2017, as the scheduled increase in the consumption tax rate goes into effect.

While emerging markets and developing economies will still account for the lion's share of world growth in 2016, prospects across countries remain uneven and generally weaker than over the past two decades, according to the report.

The WEO projects their growth rate to increase only modestly - relative to 2015 - to 4.1 per cent this year and 4.6 per cent next year. The forecast is based on a variety of factors, such as slowing growth in oil exporters, with oil price decline, and still weak outlook for non-oil commodity exporters, including in Latin America.

In China, there was a modest economic slowdown, where growth continues to shift away from manufacturing and investment to services and consumption.

The deep recessions in Brazil and Russia, and weak growth in some Latin America and Middle East countries, particularly those hit hard by the oil price decline and intensifying conflicts and security risks.

Diminished growth prospects in many African and low-income nations due to the unfavorable global environment.

The report cites the possibility of a return of financial turmoil, impairing confidence. For instance, an additional bout of exchange rate depreciation in emerging market economies could further worsen corporate balance sheets, and a sharp decline in capital inflows could force a rapid compression of domestic demand it said.

Besides, a protracted period of low oil prices could further destabilise the outlook for oil-exporting countries while a sharper slowdown in China than currently projected could have strong international spillovers through trade, commodity prices, and confidence, and lead to a more generalised slowdown in the global economy, it said.

On the upside, the recent decline in oil prices may boost demand in oil-importing countries more strongly than currently envisaged, including through consumers' possible perception that prices will remain lower for longer.

The report suggested more aggressive policy actions to lift demand and supply potential to foster stronger growth in both the short and longer term.

The WEO emphasises a three-pronged approach of mutually reinforcing policy levers, which include structural reforms, fiscal support, with growth-friendly composition of revenue and spending, and fiscal stimulus where there is a need and where fiscal space allows, and monetary policy measures to offset its effects.

Carefully prioritising and sequencing reforms is essential to boost their short-term effects.

On the market side, the WEO calls for product market reforms - which aim to boost competition among firms and make it easier to start a business or attract investment - should be implemented forcefully, as they boost output even under weak macroeconomic conditions and without weighing on public finances.

Where possible, narrowing unemployment benefits and easing job protection should be accompanied by other policies to offset their short-term cost on vulnerable groups, it said.

''Reforms that are coupled with fiscal support will be the most valuable at this juncture, including reducing inefficient taxes on labor and increasing public spending on research and development and active labor market policies (reforms aimed at getting the unemployed back into work, such as job training programmes)'', the report said.

In many advanced economies, accommodative monetary policy remains essential to support economic activity and lift inflation expectations.

However, in many emerging market and developing economies, monetary policy must grapple with the impact of weaker currencies on inflation and private sector balance sheets. Exchange rate flexibility, where feasible, should be used to cushion the impact of terms of trade shocks.

Finally, further financial sector strengthening is essential, including to create a context in which monetary, fiscal, and structural policies can be most effective.

The WEO calls for cooperation to enhance the global financial safety net and global regulatory regime is also central to a resilient international and financial system.