From the looming threat of deflation to the likelihood of another recession, here's what the IMF thinks is going on in the world economy
The International Monetary Fund has released its latest health check on the global economy.
In the second of its twice yearly World Economic Outlooks, the Fund has revised down its expectations for global growth. The world is now expected to grow by only 3.3pc in 2014 (down from 3.7pc in April) and 3.8pc in 2015 (down from an earlier estimation of 4pc), say the IMF.
According to the Fund's chief economist, Olivier Blanchard, economic growth "is mediocre and a bit worse than forecast."
But aside from the headlines figures, what are the other takeaways from the report?
Falling prices are continuing to drag on growth in advanced economies. The IMF thinks inflation remains “too low” and the threat of outright deflation – or negative prices – should continue to concern policy-makers.
Although the IMF thinks it unlikely deflation will hit in a major economy by the end of the year, price rises are likely to remain below many central bank targets of around 2pc (see blue line above).
The threat of deflation is most acute in the eurozone where prices rose by just 0.3pc last month, the lowest since November 2009. As a result, the Fund calculates the probability of prices falling across the currency bloc in the last three months of the year, to be about 30pc.
Has some of our potential growth been lost forever?
One of the reasons inflation has failed to take off, despite growth in many parts of the advanced world, is due to the existence of an 'output gap' in a number countries.
This is the term economists use to describe the level of spare capacity in an economy, or the difference between current and potential growth.
A negative output gap indicates an economy is running below potential and has a way to go before growth begins to generate inflationary pressures, forcing interest rate hikes.
According to IMF estimates, the United States has the largest negative output gap in the developing world of around 3.5pc of potential GDP, while the UK's is much smaller at around -1.2pc. According to the government's fiscal watchdog, Britain's output gap is not much more than 2pc.
If the IMF's figures are closer to reality, this narrowing gap is not likely to be good news for the Chancellor, as it would mean the UK is approaching its full potential rate of growth. In such a scenario, less of our deficit and borrowing could be eliminated by stronger output and higher tax revenues. Instead, more of the work of balancing the books would have to come from further austerity.
Could another global recession be on the way?
For all the gloominess, the IMF still think there is only a one in 100 chance that global output will fall below 2pc next year - the level at which we would say the world is back in recession again.
However, when it comes to the eurozone, the Fund's estimates are far less sanguine. The IMF thinks there now a four in 10 chance the single currency area will slip back into its third recession since the financial crisis.
Euro-area growth has been largely flat for most of 2014, and a recession - defined as two consecutive quarters of negative growth - remains a distinct possibility due to the continuing "fragilities" in the global economy, say the IMF.
The European Central Bank has sought to revive growth and stoke inflation byslashing rates and introducing asset buying to get credit flowing back to the continent’s small businesses. But should these measures fail to improve the inflation outlook, the Bank “should be willing to do more, including purchases of sovereign debt,” say the Fund.
But is the IMF always right?
The IMF's forecasts, like so many projections, are prone to error and revision. It was only last year that the Fund's chief economist warned George Osborne that his austerity measures were "playing with fire".
And in a bout of navel gazing, the Fund has turned its attentions to its own forecasting history. They find that from 2011 to 2014, their one-year ahead estimates for growth were 0.6 percentage points too optimistic.
Much of these forecasting errors came from the IMF's tendency to over-shoot growth in large emerging economies such as the BRICs, and its failure to factor in the impact of the eurozone crisis three years ago.
If the recent history of the Fund's outlooks shows it prone to over-optimism, its most latest predictions will leave many hoping that undue pessimism is now the order of the day.
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