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April 12, 2016 11:40 AM, EDT

IMF Warns of Global Stagnation as Growth Outlook Cut Again

Patrick T. Fallon/Bloomberg News

A prolonged period of slow growth has left the global economy more exposed to negative shocks and raised the risk that the world will slide into stagnation, the IMF warned.

The International Monetary Fund cut its world expansion forecast, as weak exports and slowing investment dim prospects in the U.S., a consumption-tax hike saps growth in Japan and a slump in the price of everything from oil to wheat continues to hobble commodities producers. The world economy will grow 3.2% this year, down from a projected 3.4% in January, the IMF said April 12 in a quarterly update to its World Economic Outlook.

The weaker outlook is likely to weigh on finance ministers and central bankers from around the globe, who gather in Washington this week for spring meetings of the IMF and World Bank, as well as a Group of 20 session. The fund also cut its forecast for growth in 2017 to 3.5%, down from 3.6% three months ago.

“Growth has been too slow for too long,” IMF chief economist Maurice Obstfeld said. “There is no longer much room for error.”

“But by clearly recognizing the risks they jointly face and acting together to prepare for them, national policymakers can bolster confidence, support growth and guard more effectively against the risk of a derailed recovery,” he said.

The IMF cited among the biggest risks as a “return of financial turmoil itself, impairing confidence and demand in a self-confirming negative feedback loop.”

“Another threat is that persistent slow growth has scarring effects that themselves reduce potential output and with it, consumption and investment,” the IMF said. “Consecutive downgrades of future economic prospects carry the risk of a world economy that reaches stalling speed and falls into widespread secular stagnation.”

The fund cited several political and geopolitical pressures, including the rise of populism in the U.S. and Europe, the U.K.’s June referendum on whether to stay in the European Union and large-scale refugee inflows that add to strains in Europe.

“The secular stagnation scenario that one would worry about is one with steadily declining growth, which helps push investment even further down than it’s been,” Obstfeld told reporters at a press briefing in Washington. “We definitely face the risk of going into doldrums that could be politically perilous.”

Regarding the U.K. vote over staying in the EU, the IMF said that a decision to quit the bloc would pose “major challenges” and could do “severe regional and global damage by disrupting established trading relationships.”

While growth forecasts for the U.S. and euro area were marked down by 0.2 percentage point, the deepest reductions in advanced economies came in Japan.

The IMF cut its expansion estimate for the nation in half for 2016, to 0.5%, and projects a 0.1% contraction in 2017, compared with a previous forecast for 0.3% growth. The fund cited recent strengthening of the yen and weaker emerging-market demand for the forecast cut, and the scheduled consumption-tax increase for the 2017 slide.