The International Monetary Fund trimmed its global growth forecast on Tuesday for the fifth time since early last year due to a slowdown in emerging economies and the woes in recession-struck Europe.
In its mid-year health check of the world economy, the Washington-based lender also warned global growth could slow further if the pull-back from massive monetary stimulus in the United States triggers reversals in capital flows and crimps growth in developing countries.
The IMF shaved its 2013 forecast for global growth to 3.1%, as fast as the economy expanded last year and below the Fund's 3.3% projection in April. It also lowered its forecast for 2014 to 3.8% after earlier predicting a 4% expansion.
The Fund has trimmed its growth forecast for 2013 in every major report since April 2012 after initially projecting the global economy would expand by as much as 4.1% this year, a sign of the unexpectedly bumpy recovery from the global financial crisis.
In an update of its World Economic Outlook report, the IMF said it underestimated the depth of the recession in Europe, and had not expected the United States to go ahead with growth-stunting spending cuts.
Emerging markets, which had previously been the engine of the global recovery, added to the overall subdued picture in the latest outlook, entitled "Growing Pains."
The IMF cut its 2013 growth forecast for developing countries to 5%, including a lower forecast for China, Brazil, Russia, India and South Africa, often called the BRICS.
The Fund said China's slowdown was a particularly big risk, as the world's second-largest economy navigates a shift to consumption-led growth. Any slowdown could hit commodity exporters, as China is one of the world's biggest energy consumers.
"After years of strong growth, the BRICS are beginning to run into speed bumps," said Olivier Blanchard, the IMF's chief economist. And while growth in emerging countries has slowed, inflation has not fallen with it, suggesting the economies are already growing close to their potential, he said.
"This has an important implication: that growth in emerging markets will remain high, but maybe substantially lower than it was before the crisis."
A top Goldman Sachs strategist last week said investors are set to pay a hefty price for betting too much on the developing world, where countries from China to Brazil are dealing with tamped-down growth expectations and the chance of social unrest.
"Risks of a longer growth slowdown in emerging market economies have now increased due to protracted effects of domestic capacity constraints, slowing credit growth, and weak external conditions," the IMF said.
The Fund said it also assumed recent volatility in financial markets was a temporary reaction to lower growth in emerging countries and uncertainty about when the US Federal Reserve would start to pull back from its bond-buying program.
"But one cannot rule out further acts of nerves along the way," Blanchard said.
The IMF predicted the euro area would remain in recession this year, with the currency bloc's economy contracting 0.6%, before recovering slightly to expand just under 1% next year.
In its annual health check of the euro zone economy on Monday, the IMF said the region must take coordinated action to revive economic growth.
The IMF also trimmed its forecasts for U.S. growth this year to 1.7%, a more pessimistic outlook than what the White House predicted on Monday, due to continued pain from deep government spending cuts.
However, it raised its forecast for Japan. It now expects Japan's economy to grow 2% this year on the back of its monetary stimulus, which boosted confidence and private demand. It previously predicted Japan would grow 1.6% this year.
But the Fund said Japan's new economic strategy, known as "Abenomics," also poses risks for the world, as investors could lose confidence if Japan does not implement structural reforms.
The IMF also increased its projection for growth in Britain to 0.9% this year from its previous prediction of 0.7%, welcome news for British finance minister George Osborne who clashed earlier this year with the Fund over its suggestion that it was time for him to ease up on austerity.
The Fund said it still remained concerned about Britain's weak recovery.