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.
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In its mid-year health check of the world economy, the Fund 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 percent, as fast as the economy expanded last year and below the Fund's 3.3 percent projection in April. It also lowered its forecast for 2014 to 3.8 percent after earlier predicting a 4 percent 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 percent this year, suggesting the bumpy recovery from the global financial crisis may continue.
The Washington-based lender said it underestimated the depth of the recession in Europe, and also did not expect 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 percent, including a lower forecast for China, Brazil, Russia, India and South Africa, often called the BRICS.
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 in the update of its World Economic Outlook.
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 U.S. Federal Reserve would start to pull back from its bond-buying program.
If the volatility continues, growth prospects could be even worse, the IMF said.
The IMF also predicted the euro area would remain in recession this year, with growth contracting 0.6 percent, before recovering slightly to just under a 1 percent expansion next year.
In its annual health check of the euro zone economy on Monday, the IMF said the bloc must take coordinated action to revive economic growth.
The IMF also trimmed its forecasts for U.S. growth this year to 1.7 percent, 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 Japan. It now expects Japan's economy to grow 2 percent this year on the back of its monetary stimulus, which boosted confidence and private demand. It previously predicted Japan would grow 1.6 percent this year.
The IMF also increased its projection for growth in Britain to 0.9 percent this year from its previous prediction of 0.6 percent, 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.