The International Monetary Fund said the global growth projection for 2014 has been marked down by 0.3% to 3.4%, reflecting both the legacy of the weak first quarter, particularly in the U.S., and a less optimistic outlook for several emerging markets. With somewhat stronger growth expected in some advanced economies next year, the global growth projection for 2015 remains at 4%.

The IMF said global growth is expected to rebound from the second quarter of 2014, as some of the drivers underlying first quarter weakness, such as the inventory correction in the U.S., should have only temporary effects, and others should be offset by policies, including in China. But the first-quarter setback will only be partially offset.

The IMF noted that the downside risks remain a concern. Increased geopolitical risks could lead to sharply higher oil prices. Financial market risks include higher-than-expected U.S. long-term rates and a reversal of recent risk spread and volatility compression. Global growth could be weaker for longer, given the lack of robust momentum in advanced economies despite very low interest rates and the easing of other brakes to the recovery. In some major emerging market economies, the negative growth effects of supply-side constraints and the tightening of financial conditions over the past year could be more protracted.

Although there were upside surprises to activity in Japan, and also in Germany, Spain, and the UK — four negative surprises dominated.
In the U.S., the inventory overhang at the end of 2013 turned out to be larger than expected, leading to a stronger correction. A harsh winter further dampened demand, exports declined sharply after a strong fourth quarter, and output contracted in Q1/14. In China, domestic demand moderated more than expected, reflecting the authorities’ effort to rein in credit growth and a correction to real estate activity. Activity in Russia decelerated sharply as geopolitical tensions further weakened demand. In other emerging market economies, weaker-than-projected growth resulted both from weaker external demand, notably from the U.S. and China, and, in a number of cases, softer domestic demand with weaker investment growth.

To view the full IMF July report, click here.