The International Monetary Fund slightly lowered its outlook for global economic growth this year, but is optimistic about the next two years in the U.S. and Canada.
The IMF said Tuesday the global economy will grow 3.3 per cent this year, a drop from the 3.4 per cent it forecast in July, because of weakness in Japan, Latin America and Europe. In 2015, world growth could be 3.8 per cent, a reduction of two percentage points.
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But it sees “firming momentum” in Canada and the U.S., led by buoyant domestic demand in the U.S. and export growth in both countries.
The unusually harsh winter weighed on early growth in the U.S., but it is expected to achieve overall growth of 2.8 per cent in 2014 and 3 per cent in 2015.
The IMF World Economic Outlook cites the strong growth in residential investment caused by pent-up demand for housing and the improved business and consumer confidence in the U.S. as key drivers of growth. At the same time, the risk of a government budget crisis, such as the standoff that shut down spending for six weeks last year, is on hold until next March.
Better outlook for Canada
The IMF expects Canada to have GDP growth of 2.3 per cent in 2014 – the same range expected by the Bank of Canada. That's up from the 2.2 per cent it predicted in July.
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Canada’s economy will be driven by demand from the U.S., but the expected recovery of exports and business investment “has not fully materialized,” the IMF says in its report.
It also warns of the risks to the Canadian economy from low commodity prices, elevated household debt and high housing prices.
But the key risk for all global economies is the uneven recovery, with some parts of the world rebounding, while others are moribund.
Turmoil in the Ukraine and Middle East pose risks to global growth and Russia's economy is expected to be brought to a near-standstill by sanctions.
Rising interest rates a risk
Like the U.S., the Canadian economy is vulnerable to the weakness in the rest of the world, especially China, where growth is expected to be 7.4 per cent this year, down from its historic rapid pace of 7.8 per cent.
"The recovery continues, but it is weak and it is uneven," Olivier Blanchard, chief economist at the IMF, said at a press conference.
He also pointed to the potential impact of a rise in interest rates on advanced economies. He said investors have become too reliant on low rates and there could be sharp falls in financial markets if rates rise more quickly than expected.
But he said he does not foresee a return to high real rates (above two per cent) and that presents a challenge to policy makers, as they will have little room to manoeuvre in their monetary policy.