IMF sees divergent risks in new outlook

Advanced economies and emerging markets face diverging challenges in the period ahead, according to the International Monetary Fund chief economist Maurice Obstfeld, who delivered a press conference from Lima.

With dropping commodity prices and the prospect of a Federal Reserve rate hike, risks to the global economy have changed. "Risks seem more tilted to the downside than just a few months ago," Obstfeld said.

In its flagship World Economic Outlook report, released today (October 6), the IMF revealed a 20-basis point cut in its prediction for global growth both this year and next – projecting 3.1% in 2015 and 3.6% in 2016.

Emerging and low-income countries can expect to see growth of 4% this year and 4.5% next year according to the forecasts. Obstfeld acknowledged this represented a notable rebound, noting "a large number of emerging markets are having difficult times this year".

Borrowing a phrase from Christine Lagarde's speech last week, Obstfeld stated economies need a "policy upgrade" in order to prepare for the various risks they face. 

Emerging markets in particular should prepare for the Fed to move interest rates, Obstfeld stressed. Lift-off is still on the table for 2015, though markets seem to consider a 2016 move more likely. Obstfeld avoided expressing a preference for a particular date. "The Fed will raise rates when growth in the US is substantially strong," he said.

In anticipation, Obstfeld recommended a host of policy actions in emerging markets, including improved surveillance of the financial sector, greater discouragement of forex denominated borrowing – he mentioned Peru has made "important advances" in this areas – and encouragement of equity inflows.

Advanced economies face different types of challenges in the year ahead. "Deflation very much remains a threat," said Obstfeld, especially in Europe and in some parts of Asia.

At a press conference in February, the IMF emphasised the legacy of the financial crisis, stressing "financial crises leave long scars". Obstfeld revisited this theme, noting addressing non-performing loans "remain imperative" for advanced economies in dealing with the crisis legacy.

However, there are some overarching policies which all economies should adhere to. Obstfeld stressed infrastructure investment and targeted structural reforms were policy efforts many countries could try and accommodate.