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IMF Predicts Slowdown in These Key Countries

IMF Predicts Slowdown in These Key Countries

WASHINGTON (AP) -- The International Monetary Fund said Tuesday that it sees slower global growth in 2013 and 2014 than it did just three months ago, citing expectations of a slowdown in key developing countries such as China and Brazil and a more protracted recession in Europe.

The international lending agency released an update of its World Economic Outlook issued in April, projecting the world economy will grow at 3.1 percent this year, down from a 3.3 forecast three months ago. The 2014 projection was cut to 3.8 percent from 4.0 percent.

Chinese Premier Li Keqiang (Left) accompanies former Australian Prime Minister Julia Gillard (Right) to view an honor guard during a welcoming ceremony outside the Great Hall of the People on April 9, 2013 in Beijing, China. (Getty Images)

"The world economy remains in a three-speed mode," said Olivier Blanchard, IMF director of research. "Emerging markets are still growing rapidly. The U.S. recovery is steady, but much of Europe continues to struggle," he told a news conference in Washington, where the IMF is based.

Blanchard said growth almost everywhere is a bit weaker than forecast in April, but downward revisions are particularly noticeable in developing countries.

The IMF said the possibility of a more drawn-out slowdown in developing countries is a new risk that has emerged since April. Blanchard noted a clear downward trend in China, Russia, Brazil and India and attributed it to slowdowns in domestic demand and consumption but also to weaker exports because of sluggishness in advanced economies.

China's 2013 forecast was scaled back to 7.8 compared to 8.1 in April. For 2014, it fell to 7.7 from 8.3 percent.

"My impression is the country where there is the largest risk in terms of large decrease in growth is China," said Blanchard.

The IMF said the world's second largest economy has become unbalanced with too much investment and too little consumption. That investment, largely financed through China's shadow banking system, has grown rapidly during the global financial crisis of the past few years.

In addition to slowing growth, China is seeing a credit squeeze as it tries to tackle the hazards of looming debts that are not reported on bank balance sheets but lurk throughout the country's murky, still developing financial system. That off-balance-sheet lending, or shadow financing, could threaten financial stability if not reined in.

Some experts see the move to crack down on excess leverage as an overdue and necessary effort to address structural problems in China's state-dominated economy.

Still China's expected growth of nearly 8 percent annually is still very robust compared to advanced economies.

Rio de Janeiro, Brazil, police. (Getty Images)

Another potential drag on global growth is the possibility that the U.S. will start tapering its extraordinary stimulus program of bond-buying. The Fed program -- known as quantitative easing -- has injected more $2 trillion into financial markets since late 2008 and kept borrowing costs down.

With markets already anticipating the tapering, the IMF said some developing countries are already feeling the effects in the form of falling share prices and depreciating currencies.

A recession in the 17 countries that use the euro currency is shaping up to be deeper than expected, another factor pulling down the forecast, the IMF said. The eurozone is now expected to contract by 0.6 percent this year, compared to the April forecast for a 0.4 percent decline.

"At least in France and to some extent in Germany, there is I think a general lack of confidence in the future, which if it doesn't turn around may end up being partly self-fulfilling, which is worrisome," said Blanchard.

The U.S. economy also looks weaker than previously expected, the IMF said, citing tight fiscal and financial conditions.

Vladmir Putin. (Getty Images)

IMF chief Christine Lagarde has been frequently criticizing the U.S. for cutting government spending, saying it has been slashing too much, too fast. She has blasted the so-called sequester - the automatic across-the-board spending cuts instituted in March because Congress could not agree at that time on a budget and debt deal.

The IMF lowered forecasts for U.S. growth to 1.7 percent in 2013, down from 1.9 in April, and to 2.7 percent for 2014 down from 2.9 percent. One reason cited was the sequester remaining in place until 2014, longer than previously projected.

Japan bucked the global trend. The IMF revised its 2013 growth forecast up to 2.0 percent from 1.5 percent in April.

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Featured image AP photo.

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