Global Growth Disappoints, Pace of Recovery Uneven and Country-Specific

Global growth at 3.3 percent in 2014 and 3.8 percent in 2015; forecasts shaved down since April

Legacies from crisis, low potential growth weigh on recovery

Increased downside risks to global growth, including financial and geopolitical

The IMF forecasts global growth to average 3.3 percent in 2014―unchanged from 2013―and to rise to 3.8 percent in 2015. The weaker than expected growth outlook for 2014 reflects setbacks to economic activity in the advanced economies during the first half of 2014, and a less optimistic outlook for several emerging market economies, says the report.

Potential growth rates—that is, the pace at which annual output can expand without pushing up inflation—are also being revised down. “These worse prospects are in turn affecting confidence, demand, and growth today,” says Olivier Blanchard, Economic Counsellor and head of the IMF’s Research Department.

Two underlying forces weigh on global recovery, according to Blanchard. “In advanced economies, the legacies of the precrisis boom and the subsequent recession, notably high debt burdens and unemployment, still cast a shadow on the recovery, and low potential growth ahead is a concern.” Several emerging markets are also adjusting to lower potential growth.

Across the globe, investment has been weaker than expected for some time. As a result, “global growth is still mediocre,” says Blanchard.

At the same time, Blanchard notes, economic evolution is becoming more differentiated in major countries and regions, with the pace of recovery reflecting various country-specific conditions.

Growth prospects vary in advanced economies

In advanced economies, growth is forecast to rise to 1.8 percent in 2014 and 2.3 percent in 2015.

Much of the projected strengthening in activity reflects faster growth in the United States following a temporary setback in the first quarter of this year. Employment growth has been strong, and household balance sheets have improved amid favorable financial conditions and a recovering housing market.

In the euro area, recent growth disappointments highlight lingering fragilities. A gradual, but weak recovery is projected to take hold, supported by a sharp compression in interest spreads for stressed economies and record-low long-term interest rates in core euro area economies.

In Japan, GDP contracted more than expected in the second quarter of 2014 in the wake of an increase in the consumption tax. Looking ahead, private investment is...