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IMF warns global growth could be 'derailed' over the next two years

Global growth could be "derailed" over the next two years if key transitions in the world economy are not successfully navigated, the International Monetary Fund has warned.

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Global growth worries for 2016: Lagarde

Global growth will disappoint in 2016 and the outlook for the medium-term has deteriorated, the head of the IMF, Christine Lagarde announced late last year.

It has surprisingly downgraded its predictions for global growth for 2016 and 2017, cutting growth estimates by 0.2 percentage points across the board for advanced economies, for emerging markets, and for the world, over both years.

The move will wipe away billions of dollars in potential global GDP, leaving the Turnbull government with an even tougher task when preparing its May budget.

The IMF says ongoing problems with China's economic rebalancing, the huge fall in global commodity prices and rising US interest rates are seriously hampering global growth efforts.

"This coming year is going to be a year of great challenges and policymakers should be thinking about short-term resilience and the ways they can bolster it, but also about the longer-term growth prospects," IMF economic counsellor and director of research Maurice Obstfeld warned on Tuesday.

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"Unless the key transitions in the world economy are successfully navigated, global growth could be derailed."

The IMF's world economic outlook update confirms what some economists have been warning about for months – growth is lacklustre in developing economies, and is contracting in countries such as Russia, Brazil, and Latin America.

The IMF revisions show global growth of 3.4 per cent in 2016 (down from 3.6 per cent in October) and 3.6 per cent in 2017 (down from 3.8 per cent in October).

They also show the US economy growing by 2.6 per cent in 2016 and 2017, down from 2.8 per cent, and the eurozone growing by just 1.7 per cent, down from 1.8 per cent.

The Turnbull government's recent mid-year budget update already revised Australia's real GDP growth downwards for 2015‑16, from the budget forecast of 2.75 per cent to 2.5 per cent.

Treasurer Scott Morrison told Fairfax Media he was "keenly aware of the strong headwinds" impacting the global economy and the revisions to global growth forecasts by the IMF were not unanticipated.

This coming year is going to be a year of great challenges and policymakers should be thinking about short-term resilience and the ways they can bolster it

Maurice Obstfeld

"In the mid-year budget update last year, the government recognised these changes taking place in the global economy by revising our own growth forecasts to more realistically reflect the conditions we are now facing," Mr Morrison said.

"The forecasts announced by the IMF for global growth today are consistent with those contained in that update.

"More importantly, the IMF statement rightly points to the need for important structural reforms to drive economic growth. Failure to make these important changes puts jobs at risk. This is why the government is looking at ways we can make our tax system more growth friendly, in particular by reducing personal income taxes."

The IMF report comes as new figures showed China's economy grew at its slowest pace for 25 years in the three months to December.

The report says there is an "urgent need" for policymakers to raise actual and potential growth through a mix of demand support and structural reforms, and that structural reforms, in particular, remain critical.

"Priorities vary, but many advanced economies would benefit from reforms to strengthen labour force participation (Japan, euro area) and overall employment levels (given ageing populations), as well as measures to tackle private debt overhangs," the report says.

"Policymakers in emerging markets and developing economies need to redirect activity to new sources of growth. Lifting growth will also ensure continued convergence towards advanced economy income levels."

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