WASHINGTON – The International Monetary Fund on Tuesday slashed its projection for Japan’s economic growth by the most of any developed country, while also cutting its growth estimate for the global economy in view of mounting geopolitical tensions.
In its semiannual World Economic Outlook report, the IMF said Japan will grow a real, or inflation-adjusted, 0.9 percent this year, down 0.7 percent from its earlier July estimate, citing the protracted impact of the April consumption tax rate hike.
“In Japan, the decline in domestic demand following the increase in the consumption tax was larger than expected,” the Washington-based lender said.
The consumption tax went up to 8 percent on April 1, from 5 percent.
The IMF, which also trimmed its 2015 growth forecast for Japan to 0.8 percent from a previous 1 percent estimate, said it hopes private investment will rebound in the second half of 2014, and repeated its call to step up the implementation of structural reforms to shore up growth.
“Japan has to achieve stronger private demand,” Olivier Blanchard, IMF chief economist, told a news conference at IMF headquarters, warning that the growth potential growth in Japan is “very, very low.”
Implementation of the proposed second consumption tax hike to 10 percent in October 2015 is “critical” to establish fiscal discipline but is likely to take a heavy toll on domestic demand, the IMF said.
The global economy will expand 3.3 percent this year and 3.8 percent next year, the IMF said, revising its forecasts downward by 0.1 percent and 0.2 percent, respectively.
“Downside risks have increased since the spring,” the IMF said, referring to “a worsening of geopolitical tensions” related to the Ukrainian crisis and protracted conflict in the Middle East as a short-term risk to the overall global economy.
The report added that low potential growth in advanced countries is a mid-term risk, forecasting growth rates for major economies at 1.8 percent for 2014 and 2.3 percent for 2015, both virtually unchanged from July’s projections.
The IMF raised its annual outlook for the United States by 0.5 points to 2.2 percent on the back of data showing a durable economic recovery but trimmed its forecast for the eurozone by 0.3 points to 0.8 percent due to low inflation and shrinking demand.
The growth estimate for emerging economies for this year was reduced by 0.1 point to 4.4 percent due to “a decline in potential growth.”
The IMF maintained its growth projection for China this year at 7.4 percent but slashed its forecast for Brazil by 1 point to 0.3 percent due to a contraction in the first half of this year.