IMF downgrades global growth

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The January update to the IMF’s October World Economic Outlook is actually a downgrade. The cut is a modest 10bps per year: forecasts are now for global growth of 3.5% and 4.1% for 2013 and 2014.

If you were looking at the data you would not be that surprised, but if you were looking at the equity market you may be confused ….

Global growth is projected to increase during 2013, as the factors underlying soft global activity are expected to subside. However, this upturn is projected to be more gradual than in the October 2012 World Economic Outlook (WEO) projections.

Policy actions have lowered acute crisis risks in the euro area and the United States. But in the euro area, the return to recovery after a protracted contraction is delayed. While Japan has slid into recession, stimulus is expected to boost growth in the near term.

At the same time, policies have supported a modest growth pickup in some emerging market economies, although others continue to struggle with weak external demand and domestic bottlenecks.

If crisis risks do not materialize and financial conditions continue to improve, global growth could be stronger than projected. However, downside risks remain significant, including renewed setbacks in the euro area and risks of excessive near-term fiscal consolidation in the United States. Policy action must urgently address these risks.

This is an important development in terms of the scope for central banks to keep easing — and certainly makes it easier for the RBA to justify a move in Feb (lower than expected inflation, and slower global demand growth make a fairly standard case).